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A  SUMMARY 


Law  of  Private  Corporations 


BY 

LESLIE  J.  TOMPKINS, 

PROFESSOR    OF    LAW,    NEW    YORK    UNIVERSITY. 


NEW  YORK: 
BAKER,   VOORHIS  &  COMPANY. 
1004.  ^ 


Copyright,   1904, 
-By  BAKER,  VOORHIS  &  COMPANY. 

T 
TGOOlf 


J.    B.   LVON    COMPANY 

PRINTERS    AND     BINDERS 

ALBANY,    N.    Y. 


PREFACE. 


This  work  is  intended  to  be  a  Summai'j  of  the  Law 
of  Private  Corporations.  To  summarize  a  subject  so 
prolific  in  decisions,  and  confine  it  within*  the  space 
desired,  will  admit  of  no  extended  discussion  of  the 
rules  as  they  exist.  The  idea  in  mind  has  been  to 
state  in  a  systematic  way  the  rules  of  law  on  the  subject, 
and  to  state  them  in  as  few  words  as  possible.  In  doing 
this,  the  language  of  the  decisions,  and  in  a  few  in- 
stances, the  language  of  the  text-writers,  has  been  used, 
the  writer  finding  it  unnecessary,  and  in  many  cases 
impossible,  to  state  the  rule  more  concisely  or  accurately- 
Being  a  summary,  only  leading  cases  have  been 
cited  in  most  instances,  and  in  others,  such  cases  a& 
were  necessary  to  support  the  point  made. 

The  excellent  and  important  treatises  on  the  subject 
by  ]\Ir.  Victor  ]\Iorawetz,  Judge  Thompson,  Mr.  Cook, 
and  Mr.  Taylor,  have  been  consulted  and  frequently 
cited. 

L.  J.  T. 

'N'EW   YOEK   UxiVEESITY, 

January  15,  1904. 


7564G9 


CONTENTS 


CHAPTER  I. 

THE   HISTORY,   DEFINITIONS,    AND   CLASSIFICATION    OF    CORPORATIONS. 

PAGE. 

History     1 

General   Divisions    4 

Definitions     6 

The  Corporation  v.  Partnership   7 

The  Corporation  v.  Joint-Stock  Companies   9 

The  Corporation  v.  Shareholder   10 

CHAPTER    II. 

THE   CREATION    AND   CITIZENSHIP   OF   A   CORPOR.\TION. 

Creation  of  Corporations    13 

Acceptance  of  Charter 16 

Citizenship     1" 

Corporations  De  Jure   20 

Corporations  De  Facto   22 

Corporations  by  Estoppel    27 

CHAPTER    III. 

THE    CORPORATION    AND    THE    STATE. 

In  General 29 

Interpretation   of   Charters 32 

Power  to  Repeal,  Alter,  etc 33 

The  Police  Power   37 

Eminent  Domain    40 

Control  over  Foreign  Corporations 42 

Taxation   44 

Dissolution    50 

CHAPTER   IV. 

THE   POWERS   OF   \  CORPORATION. 

To  Make  Contracts 59 

To  Take,  Hold  and  Transfer  Real  Property GO 


VI  CONTENTS. 

PAGE. 

To  Take  by  Devise   64 

Ultra  Vires  Conveyances    65 

To  Alienate    Property    66 

To  Lease  Property   66 

To  Borrow  :Money  67 

To  Mortgage  its  Property 67 

To  Issue  Negotiable  Paper  68 

To  Act  as  Trustee 69 

To  Enter  into  a  Partnership" 70 

To  Acquire  its  Own  Stock 72 

To  Acquire  Stock  in  Other  Corporations  73 

To  Make  By-laws   74 

CHAPTER   V. 

GENERAL    POWERS    AND    ULTRA    VIRES. 

Powers  in  General 76 

Ultra  Vires  Acts    78 

CHAPTER   VI. 

LIABILITY    OF    A    CORPORATION    FOR    TORTS,    CRIMES,    ETC 89 

CHAPTER  VII. 

MEMBERSHIP  —  ITS    RIGHTS,    REMEDIES,    AND    LIABILITIES. 

Who  May  Become  Shareholders   98 

Capital  Stock  and  Shares  of  Stock   99 

Subscriptions  for  Stock 102 

Subscriptions  upon  Conditions 107 

Fraudulent  Subscriptions   110 

The  Right  to  Rescind  a  Subscription 112 

Assessments  and  Calls    114 

Rights  and  Remedies  of  ^lembers 116 

To  a  Certificate  of  Shares 117 

To  Transfer  his  Shares  117 

To  Vote   118 

To  Inspect  Corporate  Records 121 

To  Dividends     124 

To  Preference  uj>on   Increased  Capital   131 

To  Interfere  with  Corporate  Business 132 

Liability  of  ^Members   137 

Set-ofT  bv  Shareholders  148 


CONTEXTS.  VU 
CHAPTER    VIII. 

MAKAGEMEIfT.  PAGE. 

Corporate  Meetings  150 

The  Power  of  the  Majority 153 

By-laws  —  Power  to  Make   157 

Directors  —  Powers  and  Duties 160 

Officers  and  Agents  Other  than  Directors 173 

CHAPTER   IX. 

TRANSFER. 

Lien  on  Stock 182 

Gifts  of  Stock 188 

Transfer    189 

CHAPTER    X. 
creditors'  rights  and  remedies. 

The  Creditor  and  the  Corporation 199 

The  Creditor  and  the  Shareholder 210 

CHAPTER   XI. 

combinations. 

Consolidation     220 

Reorganization 22.5 

Pooling  Agreements    .' 229 

Voting   Trusts 230 

Trust   Combinations    232 

CHAPTER  XII. 

Promoters     237 


TABLE  OF  CASES  CITED. 


A.  PAGE. 

A.  A.  Griffing  Iron  Co.,  Re  The 180 

Abbott  V.  Hapgood   246-248 

Aberdeen  R.  Co.  v.  Blaikie   160 

Ackerman  v.  Halsey    163 

Adler  v.  Milwaukee,  etc.,  Co 143 

Adriance  v.  Roome   175 

Aiken  v.  Colorado  River,  etc.,  Co 137 

Albany,  etc.,  Ry.  Co.  v.  Fields   Ill 

Alexander  v.  Cauldwell    175 

Alexander  v.  Tolleston  Club   65 

Allen  V.  IMontgonierv,  etc.,  Ry.  Co 195 

Allen  V.  Woonsocket  Co 71 

Am.  Bible  Soc.  v.  Marshall   65 

American  Loan,  etc.,  Co.  v.  Minnesota,  etc.,  Co 223 

Am.  Rj'.  Frog  Co.  v.  Haven 119-123 

Auburn  Bolt  &  Nut  Co.  v.  Schultz   104 

Andrews  v.  Ohio,  etc..  Ry.  Co Ill 

Anglo-California  Bank  v.  Grangers'  Bank 184 

Appeal  of  Cornell    108 

Argenti  v.  San  Francisco   83,  86 

Arnold  v.  Suffolk  Bank   117.   183,  185 

Arthur  v.  Griswold    176 

Asbury,  etc.,  Co.  v.  Riche  81,  84 

Ashley's    Case    112 

Ashley  v.  Ryan    44 

Ashley  Wire  Co.  v.  Illinois  Steel  Co 159,  174 

Asiatic  Banking  Co.,  Re   73 

Aspinwall  v.  Davies   17 

Athol  Music  Hall  Co.  v.  Gary 102 

Atwood  V.   IMerrvweather    155,  240 

Auburn  Bolt  &  Nut  Co.  v.  Schultz   104 

Aultman's    Appeal     145 

B. 

Badger,  etc.,  Co.  v.  Rose   104 

Baines  v.  Babcock   218 

Baird  v.  Bank    62 

Ball  Electric  Light  Co.  v.  Child   148 

Baltimore.  etc.^Rv.   Co.   v.   Fifth  Baptist  Church 91 

Bank  v.  Billings    33 

Bank  v.   Dovetail,  etc..   Co 209 

Bank  v.  IMcDonald    27 

Bank  v.  Poitiaux 65 

Bank  v.  Potts 209 

[ix] 


X  TABLE    or    CASKS    CITED. 

PAGE. 

J>;mk  V.   Wickorsliain T2 

IJiiiik   of   Anicrica    v.   ^JcXcil    18G 

JSaiik  of  Atcliinson  v.  Duifoe   185 

]>ank  of  Attica  v.  Manufacturers'  Bank   184 

15ank  of  Auj^'usta  v.  Earle  18,  7G 

]?ank  of  Cliarlotte  v.  National  Bank   74 

Bank  of  Chenango   v.    Brown    14 

Bank  of  Col.   v.   Patterson's   Adnir CO 

Bank  of  Holly  Springs  v.  Pinson    184 

Bank  of  Montreal    v.    Thayer    170 

Bank  of  ^letropolis   v.    Jones    174 

Bank  of  Republic    v.    Young    09 

Bank  of  Saginaw  v.  Pierson   172,  173 

Bank  of  U.   S.  v.   Dandridge    70 

Barnes  v.  Black,  etc..   Coal   Co 159 

Barnes  v.  Trenton  Gas  Light  Co 179 

Barnes  v.  Trevor   14S 

Barrv  v.  Merchants'  Ex.  Co 60,  03,  07 

Bartiett  v.  Drew   144 

Batenian   v.    :Mid- Wales   Ry.    Co 08 

Batli  Gas  Light  Co.  v.  Claflfy   84,  86 

Bates  V.  Telegraph   Co Ill 

Bates  V.  X.    Y.    Ins.    Co 1  S-i 

Bath  Sav.  Inst.  v.  Sagedahoe,  etc..  Bank 183 

Bausnian   v.   Kinnear    148 

Beardsley  v.  Johnson    152,  100 

jJeckley  v.  Schlay    21G 

Beer  Co.  v.  Mass 37 

Beers  v.  Bridgeport  Spring  Co 131 

Beeknian  v.  Saratoga,  etc.,  Rv.  Co 41 

Belfast,  etc.,  Ry.  Co.  v.  Belfast 124,  131 

Bcnl)0\v   V.    Cook    151 

Benedict  v.  Western  Union,  etc.,  Co 230 

Bennett   v.    Holbeck    63 

Bennington  v.   Gittings    189 

Beveridge  v.  X.  Y.-  Elevated  Ry.  Co 162 

Bigelow  V.   Gregory    16 

Bingliamton  Bridge  Co.  Case   33 

Bird  V.  Daggett 86 

Bird,  etc.,  Co.  v.  Humes 103 

Bishop  v.   Globe   Co 184 

Bissell  V.  :\rich.  So.  Rv.  Co 09,  83,  S6 

Black  V.  D.  o:  H.  Canal  Co 223 

Black  River,  etc..  Ry.   Co.  v.  Barnard 25 

Bliss  V.  Kcweah    Canal,    etc.,    Co 178 

Bliss  V.  Malloson    228 

Bloom  V.  Xational.  etc.,  Co 106 

Bonnlnian  v.  Lake  Shore,  etc.,  Ry.  Co 128.   131.   105,  225 

Bonrd   of  Excise  v.   Barrie    38 

Bohnier    v.    HafTen    222 

Bolm  V.   Brown    146 

Bond  V.   Appleton    145 

Boston  Glass  Co.  v.  Langdon  53,  209 

Boston,  etc.,  As.sn.  v.  Corv 191 


TABLE  OF  CASES  CITED.  XI 


Boston,  etc.,  Ey.  Co.  v.  Gilmore   20G 

Boston  Ry.  Co.  v.  Salem  Ry.  Co 42 

Bosworth  Y.   Allen    163 

Bound  V.  S.  C.  Ry.  Co ' 229 

Bourdette   v.    Sieward    123 

Bowditch  V.  New  England,  etc..  Ins.  Co 179 

Boynton  v.  Roe    209 

Bradford,   etc.,   Co.   v.   Briggs    18u 

Bradley  v.  Ballard   68 

Bradley  v.  Reppell    2^ 

Branch  v.   Jessup    222 

Brennan  v.  Tracy    07 

Brent  v.   Bank  of  Washington    159,  182.   184,  185,  187 

Brewster  v.   Hatch    24.3 

Brewster   v.   Lathrop    128 

Bridgeport,  etc.,  Co.  v.  Tritsch   137 

Briggs  V.  Cape  Cod  Co 24 

Briggs  V.  Spanlding 163,  165 

Brightman  v.   Bates    232 

Brisbane  v.  D.,  L.  &  W.  Ry.  Co 195,  197 

Bristol  V.   Chicago,  etc.,  Ry.   Co 18 

Bristol,  etc.,  Co.  v.  Probasco   219 

Broadway  Bank  v.  McElrath    196 

Bronson  v.  La  Crosse  Ry.  Co 135 

Brooklyn,   etc.,   Co.   v.   Brooklyn 55 

Brown  v.  Furniture   Co 209 

Brown  v.  Hogg 62 

Brown  v.  Pacific  Mail   Co 232 

Brown  v.  Winnisimmet  Co 59,  78 

Bruffett  V.  Great  Western  Ry.  Co 22G 

Brvan  v.   Carter    184 

Buffalo  Lubricating  Oil  Co.  v.  Standard  Oil  Co 92 

Bullard  v.  National  Eagle  Bank    183 

Burbank    v.    Dennis     238 

Burke  v.  Smith   108,  139 

Burrall  v.  Bushwick  Ry.   Co 100 

Burrill  y.  Xahant  Bank  162 

Burrows  y.  Smith   105 

Butler   V.    Watkins    92 

Butler  Univ.   v.   Scoonoyer    117 

Butts   V.   Wood    170 


Cabot,  etc.,  Bridge  Co.  y.  Chapin    107 

Caldwell  v.  N.  J.  Steam,  etc..  Co 95 

California,  etc..  Co.  y.  Callender   115 

California  v.  Central  Pac.  Ry.  Co 45,  40 

Camden  v.  Stuart   143 

Camden  Safe,  etc.,  Co.  v.  Ingham 70 

Camden,  etc.,  Ry.  Co.  v.  Mays,  etc.,  Ry.  Co 86 

Cameron  v.  Groyeland  Imp.  Co 137 

Campbell  v.  Watson    163 

Camp.  Mfg.  Co.  y.  Reamer   173 

Cape  May,  etc.,  Nav.  Co.,  Re   119 


xii  TABLE    OF    CASES    CITED. 

PAOS. 

CiiriiKxly  V.   Powers   ~i^>  ~^^ 

Carroll   v.   Miillanphy,  etc.,  Bank 18.3 

Carver   v.    IJaiiitree  Mfg.   Co l-llj 

Cuse  V.  JJaiik 1!^7 

Case  V.   Kellv 'i--  '^4,  85 

Catlin  V.  Kagle  Bank   207,  200 

Catskill  Bank  v.  Gray   ^1 

Cecil,  etc..  Bank  v.   Watsontown  Bank ISO,   187,  18S 

Central    Land  Co.  v.  Oberchain    -41 

Central   Kv.  Co.  v.   Collins    '■'> 

Central  Uv.  Co.  v.  Kisch 110.  Ill 

Central   Rv.  Co.  v.  Smith 8li 

Central  Transportation  Co.  v.  P.  P.  C.  Co 82,  83,  84 

Chabe  v.  Nicarajrua   Canal,  etc.,  Co 12.5 

Chambers  v.  McKee    162 

Chambers  v.  M.  &  M.  Ry.  Co 81 

Chandler   v.    Bacon    239,  240 

Chapman  v.  Bates   231 

Chaj)in   v.    Lonfjworth    248 

Charles  Kiver  Bridge  Co.  v.  Warren  Bridge  Co 32 

Charlick  v.    Flushing  Ry.  Co 123 

Charlotte,  etc..  Rv.  Co.  v.  Gibbes   221 

Clui'ver  V.  Rutlarid,  etc.,  Ry.  Co 210 

Chesley  v.  Pierce  147 

Chenev  v.  Gleason   240 

Chicago  City  Ry.  Co.  v.  Allerton    162 

Chicago,  etc.,  Ry.  Co.  v.  Chicago   Bank    206 

Chicago,  etc.,  Rv.  Co.  v.  Derkes 83 

Chicago,  etc.,  "Ry.  Co.  v.  Howard   228 

Chicago,  etc.,  Ry.  Co.  v.  James    ITS 

Chicago,  etc.,  Ry.  Co.  v.  Minn 39 

Chicago,  etc.,  Rv.  Co.  v.  Moflitt   22.5 

Chicago,  etc.,  Ry.  Co.  v.  Third   Nat.    Bank,   etc 20S 

Chicago   Ins.  Co.  v.  Needles    3S 

Chicora  Co.  v.  Crews   20 

Child  V.   Boston,    etc.,    Co 140 

(  hild  v.  New  York,  etc.,  Rv.   Co 228 

Christcnsen   v.   Eno    " 139,  215 

Christian   Union  v.   Yount    6o 

Chubb  V.  Upton   27 

Church    V.    Pickett    23 

Cincinnati,   etc..  Co.   v.   TTofTmeister    123 

Citizens,  etc..  Co.  v.  Coriell    104 

City,  etc.,   v.   Fry    49 

Citizens,  etc.,  Bank  v.  Kalamazoo,  etc..  Bank 187 

(  lapj)  V.   I'eterson    72 

Clarke  v.  Richmond,  etc.,  Co 120 

(lark  V.  Thomas    116 

(  learwater    v.    :Mcredith     222 

(  leveland.  etc..  Ry.  Co.  v.  Closser 230 

Cochran   v.   Arnold    24 

Cochran  v.  \\'eichers   145 

Cochrill   V.  Abeles 100 

Cockrill   V.   Cooper 101 


TABLE    OF    CASES    CITED.  Xlll 


PAGE. 

Coe  V.  Columbus,  etc.,  Ry.  Co 20'i 

Cohn  V.  Waters   208 

Coit  V.  Gold,  etc.,  Co 21'J 

Cole  V.   Millerton    20S 

Cole    V.    Millerton    Iron    Co 205 

Coleman  v.  Columbia  Oil  Co 12S 

Coleman  v.  Eastern  Co.  Ry.  Co 80 

Coleman  v.  Howe   215,  21S 

Coleman  v.  New  York,  etc.,   Ry.   Co 91 

Coleman  v.   San   R.    T.    R.    Co <33 

Coleman  v.  Second  Ave.   Ry.   Co 16G 

( 'oler  V.   Grainger    187 

Colfax  Hotel  Co.  v.  Lyons  107 

Colorado,  etc.,  Co.  v.  Lenhart   172 

Columbian  Bank's  Estate    72 

Com.  V.  New  Bedford  Bridge  Co 9(5 

Com.  V.  Crompton   180 

Com.  V.  Cullen 150 

Com.  V.  Dalzell    119 

Com.  V.  Proprietors,    etc 97 

Commonwealth  v.  Smith OS 

Commercial  Bank  v.  Burch  72 

Com.   Bank  v.   Chatfield    163 

Commercial  Bank    v.    Pfeifl'er    27 

Commercial  Mutual,  etc.,  Ins.  Co.  v.  Union 174 

Compton  V.  Wabash  Ry.  Co 225 

Concord  Rv.  Co.  v.  Greelv   42 

Cone  V.  Russell    \ 232 

Conger  v.  Chicago,  etc.,  Ry.   Co 179 

Conklin  v.  Second  Nat.  Bank   183 

Conro  V.  Gray    207 

Conservators  of  River  Tone  v.  Ash 7 

Continental,  etc..  Co    v.  Toledo,  etc.,  Rv.  Co 223 

Cook  V.  Moody   209 

Cook  V.  Sherman   133 

Coppin  V.  Greenless  Co 72 

Corey    v.    Wadsworth     172 

Cork,  etc.,  Ry.  Co.,  Re  82 

Cortes   Co.    v.    Tliannhauser    239 

Covington  v.  Covington  Bridge  Co 35 

Covington,  etc.,  Co.  v.  Bowler   163 

Covington,  etc.,  Co.  v.  Sheperd   210 

Coxe  v.  State 26 

Crosby.  Re   122,  123 

Cumberland,  etc.,  Canal  Co.  v.  Portland   95 

Cunningham  v.   Alabama  Life  Ins.,  etc..  Co 185 

Currie  v.  School  District  No.  26 .  . 167 

Currier  v.   Continental,  etc.,   Co 158 

Currier  v.  Slate  Co 72 

Curtis   V.   Leavitt    68 

Cushman  v.  Thaver  Mfg.  Co 118 

Craig  Co.  v.  Smith   152 

Crandall  v.  Lincoln   72 

Crease  v.  Babcock   141 


xiv  TABLE    OF    CASES    CITED. 

PAGE. 

Credit  Co.  V.  Howe,  etc.,   Co l^i 

Crocker  v.  New  I^ndon,  etc.,  Ry.  Co !.H 

Croinie  v.  Louisville,  etc.,  Society  66 

Crum  V.  Bliss 64 

D. 

Dalton,  etc..  Rv.  Co.  v.  McDaniel 217 

Danville,  etc..  Rv-  Co.  v.  Com 97 

DartmoTitli    College   Case    6 

Darst  V.   Gale    . 83 

Davis  V.  Gray    -"j^ 

Davis  V.  :Memphis  City  Rv.  Co 170 

Davis  V.  Mills 172 

Davis,  etc.,  Wheel  Co.  "a'.  Davis,  etc..  Wagon  Co 24G 

Day  v.  Opdensburgh  Ry.  Co 51 

Dav  V.  Spiral,  etc.,  Col  85 

Dayton,  etc.,  Co.  v.  Coy   245 

Doadorick   v.    Wilson    163 

Doansville  Cemetery  Co.,  Re    42 

Delano  v.  Case   16S 

Dennis  v.  Joslin  Co 150 

Densmore  Oil  Co.  v.  Densmore   2.38 

Denton  v.  MacXeil    244 

Denver,  etc..  Ry.  Co.  v.  Harris   01 

Dorring  v.   Hibernian,   etc.,   Co 183 

Des  Moines,  etc.,  Co.  v.  Des  Moines  Nat.  Bank   181 

Des  Moines,  etc.,   Co.  v.   West    210 

De  Varaigne  v.  Fox   42 

De  Witt  V.  City  of  San  F 63 

Do  Witt  V.  Hastings 27 

Dickerson's  Appeal    189 

Distilling,  etc.,   Co.  v.  People    234 

Doane  v.  Chicago,  etc.,  Ry.  Co 230 

Dodge  v.  Woolsey   ...'...". 47,  134,  1.55 

Donnnllv  v.  Hearndon    22R 

Doolittle  V.  :\Iarsh    146 

Dorris  v.  Sweeny   105 

Doty   V.    Patterson    25 

Dougherty    v.    Hunter    178 

Douglas  v.  Trolnnd   216,  217 

Downie  v.  Hoover    187 

Downing  v.  Mi.  Wash.  Co 32 

Driseoll  V.  West  Bradley,  etc.,  Co 182.   183,  184,   197 

Dnilley  v.  Kentucky  High  School    15.5 

DuniTiier  v.  Smedlev   215 

Dunonml)  V.  New  York,  etc.,  Ry.  Co 212 

Dunkerson,  7>!  re   \ 183,  184,  188 

Dunphy  v.  Travelers,  etc.,  Assn 13r» 

Dupee  v.  Boston,  etc.,  Co 72 

Durfee  y.  Old  Colony  154 

E. 

East  Anglian  Ry.  Co.  y.  East.  Co.'s  Ry 81 

East  Birmingham  Land  Co.  v.  Dennis 194 


TABLE  OF  CASES  CITED.  XV 


PAGE. 

East  Xorway,  etc.,  Church  v.  Froislie   65 

Eastern  Ry.  Co.  v.  Hawkes  81 

Elkins  V.  Camden,  etc..  Ry.  Co 74 

Ellerman  v.   Chicago,  etc.,   Co 181 

Elliott  V.   Siblev    187 

Ellis   V.   Marshall    17 

Ellsworth  V.   Dorwart    123 

Elvton  Land  Co.  v.  Dowdell  156,  227 

Emory  v.  Parrott   240,  24.3 

Enfield  Bridge  Co.  v.  Railway   Co 32 

England  v.  Dearborn    177 

Equitable  Trust  Co.  v.  Garis   70 

Erdnian  v.  Bowman    132 

Erie,  etc.,  Rv.  Co.  v.  Casey 35,  51 

Erie,  etc.,  Ry.  Co.  v.  State   63 

Essex,  etc.,  Co.  v.  Collier   102 

Estate  of  John  C.  McGraw  66 

Estell  V.  Univ.  of  South   63 

European,  etc.,  R.  Co.  v.  Poor   166 

Evans  v.  Boston,  etc.,  Co 68 

Evansville,  etc.,  Ry.  Co.  v.  Dunn 107 

Evansville,  etc.,  Ry.  Co.  v.  Posey 109 

Evening  Journal  Assn.  v.  McDermott 91 

Ewall  V.  Daggs    54 

Ewing  V.  Robeson 27 

Ewing  V.  Composite  Brake  Shoe  Co 228 

Ex-Mission  Land,  etc.,  Co.  v.  Flash 237,  242 

Ex  parte  Firemen's  Ins.  Co 198 

Ex  parte  Stringer   185 

Eyster  v.  Centennial  Board,  etc 125 

F. 

Falmouth  Bank  v.  Cape  Cod  Co 210 

Fanning  v.   Insurance   Co 107 

Farmers,  etc.,  Co.  v.  Young   119 

Farmers,  etc.,  Co.  v.  Toledo,  etc.,  Ry.  Co 223 

Farmers'  L.  &  T.  Co.  v.  Harmony,  etc 70 

Farmers'  Nat.  Bank  v.  Sutton,  etc.,  Co 69,  86 

Farmers,  etc.,  Ins.  Co.  v.  Chase   115 

Farrington  v.  Tenn 48,  49 

Fay  v.  Nobles   103,  177 

Felton  y.  West  Iron  Mining  Co 175 

Ferguson  v.  State   123 

Ferry  \.  Anderson   208 

Fidelity,  etc.,  Co.  v.  Niven   70 

Fietsam  v.  Hay   209 

Fifth  Baptist  Church  v.  Baltimore,  etc.,  R.  Co 16 

Finnegan  v.   Naerenberg    23 

First  Nat.  Bank,  etc.,  v.   Dovetail,  etc.,   Co 172 

First  Nat.  Bank  v.  Hartford,  etc..  Ins,  Co 182,  187 

First  Nat.  Bank  v.  Lanier 183 

First  Nat.  Bank  v.  National    Exchange    Bank    162 

First  Nat.   Bank  v.  Peavey 212 

First  Nat.  Bank  v.  Wood' 11 


XVI  TAUl.K    Ol'    CASKS    CITED. 

PAOB. 

Fisher  v.  Essex    Bank     192,  19U 

Fislicr  V.  CJnivcs Itio 

Fishor  V.  Scligman 141 

Fitcli  V.  Lewiston,  etc.,  Co 68 

Fitz>,'('ral(l   v.   Weidonbcck    173 

Flaj,rkT,  etc.,  C'o.  v.  Flagler 244 

Fliiin  V.  Hagiey   213 

Flint   V.    Pierce    159 

Fonl  V.  East  Hampton   Co 127 

Ford  V.  Hill 209 

Foss  V.  Harbottle   155,  238 

Foster  v.  Borax  Co 207 

Foster  v.   Posson    218 

Fourth  Nat.  Bank  v.   Francklyn   14!i 

Fowle   V.   Alexandria    92 

Fox  V.   Allensville,   etc.,   Co Ill 

Fr mcis  v.  New  York,  etc...  Ry.  Co 18!) 

Franklin  Bank  v.  Commercial  Bank   73 

Franklin  Bridge  Co.  v.  Wood 14,  16 

Franklin  Co.  v.   Lewiston,  etc.,   Bank    73 

Freeman   v.   Machias,  etc.,  Co IS 

Frost  V.  Coal   Co 24 

Ft.  Madison  Lumber  Co.  v.  Batavian  Bank 192 

Ft.  Wayne  Co.  v.   Franklin  Co 210 

G. 

Galbraith   v.    Building  Assn 197,  19S 

Galegher  v.  Jones   197 

Galena,  etc.,  Ry.  Co.  v.  Ennor 109 

Gallagher  v.   Brewing  Co 12 

Galveston,  etc.,  Ry.  Co.  v.  Gonzales   20 

Gamble  v.  Queens  Co.  Water  Co 167 

Gardner    v.    Butler     100,  170 

Gent  V.  Manufacturers'  Co 246 

German-American  Seminary  v.  Keifer    107 

German  Union,  etc.,  v.  Sendmejer    197 

Georgia,  etc.,  Co.  v.  Mercantile,  etc.,  Co CO 

Gettv  V.  Devlin    243 

Gibbs  V.   Con.  Gas  Co 234 

Gibbons  v.  Mahon  127 

Gibbs'  Estate,  Re    23 

GifTonl  v.  Livingston   6 

GilTord  v.  Thompson   190 

Gillespie    v.    Gaston    49 

Gilkerson  v.  Third  Ave.  Ry.  Co 189 

Glenn  v.  Garth 137 

Glass  Co.  V.  Stoehr   i>Q 

Goddard  v.  Grand  Trunk  Ry.  Co 95 

Goodspeed  v.  East  Iladdam  Bank 92 

Goodwin    V.    Hardy    120,  127 

Grand  Trunk,  etc.,'  Ry.  Co.  v.  Wellman   39 

Grangers'   Life,  etc.,  Co.  v.   Kainper    101 

Graham  v.  Boston,  etc.,   Rv.   Co 153 

Graham  v.  Railroad  Co.   .  .' 200,  201 


TABLE    OF    CASES    CITED.  XVll 


PAGE. 

Granby  Mining  Co.  v.  Richards   22 

Granger  v.  Bassett    128 

Graves    v.    Brooks    216,  217 

Gray  v.   Bank    132 

Gray   v.    Oxnard    223 

Great  Wheal,  etc.,  Co.,  Re 240 

Great  Western  Tel.  Co.  v.  Burnham 115 

Greene   v.   Graves    25 

Greene  v.  Nash    232 

Green  Bay,  etc..  Ry.  Co.  v.  Union,  etc.,  Co 59 

Green  v.  Hedenberg 74 

Greenville  Co.  v.  Planters'  Co 223 

Greenwood  v.   Freight  Co 34,  37 

Griffith  v.  Blackwater,  etc.,  Co 5G 

Grimwader  v.  Mutual  Society   165 

Griswold  v.  Haven    92 

Grommes   v.    Sullivan    68 

Grymes  v.   Hone    189 

Guarantee  Co.  v.  East  Rome  ToAvn  Co 129 

Guckert  v,  Hacke   22 

H. 

Haas  v.  Chicago,  etc.,  Society   210 

Hadden  v.  Linville   178 

Hagar   v.   Cleveland    107 

Hall  v.  Pine  River  Bank   186 

Hall  V.  U.  S.  Ins.  Co 186 

Hall  V.  Vermont,  etc.,   Ry.   Co 170,  247 

Hamilton  Co.  v.  Mass 45 

Handley  v.  Stutz   147,  215 

Hardee   v.   Sunset   Oil   Co 17Q 

Hardware  Co.  v.  Perry,  etc.,  Mfg.  Co 209 

Harpold  v.  Stobart   . ". 197 

Harris  v.  Davis 229 

Harris  v.  Thompson 42 

Harris  v.  Miss.,  etc.,  Ry.  Co 51 

Harrison's  Case    195 

Harrington  v.  Connor 54 

Harvey  v.  Linnville,  etc.,  Co 231 

Hatch"  V.  Dana    217,  218 

Havemeyer  v.  Brooklyn  Sugar  Ref.  Co 224 

Hawkins  v.  Dutchess,  etc.,  Co 91 

Hawkins  v.  Railway   Co 164 

Hawley  v.  Upton    .\ 1.39,  213 

Hawthorne  v.   Calef    147 

Hayden  v.  Davis    69 

Hayne  v.   Dandeson    185 

Hays  V.  Pittsburgh,  etc.,  Ry.  Co 115 

Hay  ward  v.    Davidson    61 

Haywood  v.  Lincoln  Lumber  Co 1  iSVt 

Hazeltine  v.  Belfast,  etc.,  Co 131 

Heard  v.   Talbot    51 

Heaston  v.  Cincinnati  Ry.  Co 28 

ii 


Xviil  TAllLK    OF    CASKS    CITED. 


PAGE. 

1  Iciknian's  Estate,  Re    24S 

I  Uiniiiway  v.  llcniiiuvay    122 

Ilirriiig  V.  N.  Y.,  etc.,  Ry.  Co 54 

Jliflirins  V.  Lansingli    17G 

1 1 if;f,'s  V.  Xortliern,  etc.,  Co 18G 

I I  ill  V.  Glasgow  Ky.  Co 35 

Hill  V.  Nisbet 160 

Hill  V.  Pioneer  Lumber  Co 171 

Hill  V.  Rockingham    Bank    197 

llilles   V.    Parrish    152 

Hodges  V.  Xew  England  Screw  Co 15G 

Hodges  V.  Rutland,  etc.,  Ry.  Co 170 

Hodges  V.  Screw  Co 74 

Hoflnian  v.  Reiehert 163 

Hofrnian  Steam  Coal  Co.  v.  Cumberland  Coal,  etc.,  Co 160 

Holder  V.  La  Fayette,  etc.,  Co 170 

Hollins  V.  Brierfield  Coal  &  Iron  Co 203,  208,  210 

Home  Ins.  Co.  v.  New  York 47 

Holmes  v.  Holmes 74 

Holmes  V.  Willard 164 

Hood  V.  X.  Y.,  etc.,  Ry.  Co 76 

IIoolc  V.  Great  Western  Ry.  Co 130 

Hopper  V.  Sage    129 

Hoppin    V.    Buffum    119 

Hospes  V.  Northwestern  Mfg.   Co 143 

Hoy  Lake  Ry.  Co.,  In  re  ISO 

Hoyt  V.  Thompson's  Ex 162 

Hubbersty  v.  Manchester,  etc.,  Ry.  Co 186 

Hughes  V.  Vermont  Copper,  etc.,  Co 124,  198 

Humbert  v.  Trinity  Church    63 

Humphrey  v.  McKissick    12 

Hun  V.  Gary    163,  164 

Htirlburt  v.  Britain    25 

Hutchinson  v.   Green    162 

Hutchins  v.  Smith 108 

Hutton  V.  Thompson 244 

I. 

Illinois  Linen  Co.  v.  Hough   170 

Illinois,  etc.,  Ry.  Co.  v.  Read    91 

InchbakI  v.   Western,   etc.,   Co 55 

Indcrwick   v.   Snell    180 

lndianaj)olis,  etc.,  Ry.  Co.  v.  Jones 225 

Ireland  v.  Globe,  etc.,  Co 75 

Iron  Mt.  Co.  v.   Mercantile  Co 92 

Isham  V.  Buckingham    195 

J. 

Jackson  v.  Hartwell    64 

Jackson  v.  Ludeling 1G3,   171,  228 

Jackson  v.  Meek 140 

Jackson  v.  Newark,  etc.,  Co 138 


TABLE    OF    CASES    CITED.  XIX 

PAGE. 

Jackson's  Adm.  v.  Newark,  etc.,  Co 130 

Jackson  v.  Twenty-third   St.   Ry.   Co 188 

Jefferson  Bank  v.  Townley   209 

Jennings  v.  Bank  of  California   183,  187 

Jennings  v.  Bank  of  Coloi'ado 193 

Jermain  v.  Lake  Shore,  etc.,  Ry.  Co 127 

Johnson   v.   Laflin    188,  193,   195,  196 

Joint  Stock  Co.  v.  Brown   16.5 

Jones  V.  Aspen  Hardware  Co 26 

Jones  V.  Barlow 172 

Jones  V.  Guaranty  Co 68 

Jones  V.  Habersham 65,  70 

Jones  V.  Kent 129 

Jones  V.  Morrison    132,  170 

Jones  V.  Terre  Haute,  etc.,  Ry.   Co 196 

K. 

Kanawha  Coal  Co.  v.  Kanawlia  Co 53 

Kean  v.  Johnson   156,  223,  224 

Kearns  v.   Leaf    207 

Keith  V.  Clark 11 

Kelley  v.  Newburyport,  etc.,  Horse  Ry.  Co 166 

Kelner  v.   Baxter    246,  248 

Kent  V.  Quicksilver  Mining  Co 158 

Kernochan,  Re   129 

Ketcham  v.  Madison,  etc.,  Co 223 

Kilpatrick   v.    Penrose,   etc.,    Co 170 

King  V.  Bank  of   England    198 

King  V.  Paterson,  etc.,  Ry.  Co 127 

Knapp   V.   Publishers,   etc 131 

Knight  V.  Old  Nat.  Bank   184 

Koch  V.  North  Ave.  Ry.  Co 25 

Kortright  v.  Buffalo,  etc..  Bank    197 

Kraft  V.  Freeman   178 

Kreissell  v.  Distilling  Co 231 

L. 

Ladywell  Mining  Co.  v.  Brooks  242 

Lagimas  Co.  v.  Lugunas  Syndicate   164 

Laflin  v.  Powder  Co 24 

La  Farge,  etc.,  Ins.  Co.  v.  Bell    179 

Lake  Ontario  Ry.  Co.  v.  Curtiss   137 

Lake  Shore.,  etc.,  Ry.  Co.  v.  Prentice    95 

Lauman  v.  Lebanon,  etc.,  Ry.  Co 156,  227 

Lawrence  v.  Nelson   148,  219 

Leavenworth  Co.  v.  Chicago,  etc.,  R.  Co 166 

Legendre  v.  New  Orleans,  etc.,  Co 122 

Leggett  v.   Bank    182 

Leggett  V.  Bank  of  Sing  Sing    185 

Lehman  v.  Knapp   87 

Leroy    v.    Insurance    Co 128 

Leslie  v.   Lorillard    79,   135,  162 

Lestapies  v.  Ingrahara   85 


XX  TAULl-:    Ul"    CASKS    CITED. 


FAGB. 

Lewis  V.  Brainord    122,  123 

Lewis    V.    W  coclenfekl     248 

Lippitt  V.  American  Wood,  etc.,  Co 190 

Little  Ivoctc,  etc.,  Ky.  Co.  v.  Perry 245 

Liverpool  Ins.  Co.  v.  Mass 7 

lx)ck   V.   Veniible    129 

Locke  V.  Farmers'  Loan  &  Tr.  Co 189 

Lockhart  v.  Van  Alstvne   124,  120 

Lockwood  V.  Mechanics'.  Nat.  Bank  182,  183,  184 

London,  etc..  Bank  v.  Brockleband   185 

Long  V.  Georgia,  etc.,  Ry.  Co 85 

Long  V.  I'enn   Ins.   Co 148 

Lord  Denman  in  Reg.  v.  Great  No.,  etc.,  Ry.  Co 96 

Losee  v.   Bullerd    146 

Lothrop  V.   Stedman    34,  207 

Low  V.  Connecticut,  etc.,  Ry.  Co 247 

Lowe  V.  E.  &  K.  Ry.  Co 105 

Lowenthal  v.  Rubber,  etc.,  Co 120 

Lowry  v.  Inman 145 

Loui.sville.  etc.,  Ry.  Co.  v.  Boeny   206 

Ixtuisville,  etc.,  Ry.  Co.  v.  Com 97 

Louisville,  etc.,  Ry.  Co.  v.  Flanagan 86 

l^ouisville,  etc..  Ry.  Co.  v.  Kentucky 221 

Lovegrove  v.  Hunt    87 

Lucas   V.   Pitney    86 

Lucas  V.   White,  etc.,   Co 76 

Lumsden's  Case   99 

Lydney    etc..  Co..  v.  Bird 241 

Lynch  v.  Metropolitan  Ry.  Co 91 

Lyon  V.  Am.  Screw  Co 123 

M. 

M.  &  0.  Ry.  Co.  V.  Yandal    105 

Magee  v.  Badger   108 

Mallett  V.  Simpson   66 

Mallory  v.  Hanaur  Oil  Works   71,  85,  234 

^lanchester,  etc.,  Co.  v.  Concord   Co 223 

Manhattan,  etc.,  Co.  v.  Phalen    86 

Mansfield,  etc.,  Ry.  Co.  v.  Brown 223 

Marburv  v.   Land  Co 74 

^larchand  v.   Loan,  etc.,  Co 247 

March  v.  Eastern  Ry.  Co 128,  196 

Margage.  etc.,  Co.  v.  Ziegler    172 

Marine   Bank  v.  Ogden    230 

Market  St.  Ry.  Co.  v.  Hellman   222 

Marlin  v.  Niagara,  etc.,  Co 69 

Marsh  v.  jNfathias    23 

ALirtin  v.   W.   J.   Johnston   Co 123 

^larvin  v.  Anderson   205 

Mason  v.  Finch    221 

Massachusetts  Iron  Co.  v.  Hooper 182 

Matson   v.   Alley    177 

Matthews  v.  Associated  Press   '. 159 


TABLE  OF  CASES  CITED.  XXI 


PAGE. 

Matthews  v.  Hoagland    189 

Matter  of  B.  W.  &  N.  Ry.  Co 55 

Matter  of  the  Estate  of  McGraw 3i 

Mayor,  etc.,  v.  New  York,  etc.,  Ferry  Co 97 

Maysville,  etc.,  Co.  v.  Johnson 113 

McArtliur  v.  Times  Co 247 

McCartee  v.   Orphans'   Asylum    G4 

McClellan  v.  Detroit  File  'Works   22(> 

McClellan  v.  Scott    92 

McCIure  v.  People's  Freight  Ry.  Co 107 

McCullagh  V.  Maryland   14 

McCutcheon  v.  Merz  Co 73,  74,  85 

McDermott  v.  Harrison    113 

McFadden  v.  Los  Angeles,  etc 158 

McKim  V.  Odom    97 

McLaren  v.  Pennington    51 

McLean  v.  Charles  Wright,  etc.,   Co 196 

McMillan  v.  Maysville,  etc.,  Ry.   Co 107 

McNaught  V.  Fis'her   104 

McNeil  V.  Tenth  Nat.  Bank   119,   195,  19i> 

McReady  v.  Rumsey    184,  180 

Mead    v.    Bimn    Ill 

Mechanics'  Bank  v.  Merchants'  Bank   182,  18S 

Mechanics'  Bank  v.  Seton   , 185 

Meeker  v.  Winthrope  Iron  Co '.  155 

Melvin  v.  Lamar  Ins.  Co 139 

Memphis  Co.  v.  Ward   209 

Merchants'  Bank  v.  Shouse    182,   183,  185 

Merchants'  Bank  v.  State    Bank    94,  175 

Merrick  v.  Peru,  etc.,  Co 212 

Merz  Co.   v.   Capsule  Co 74 

Methodist  Church   v.   Town 107 

Metropolitan,  etc.,  Ry.  Co.  v.  Manhattan,  etc.,  Ry.  Co.  .    149,  162 

Middlesex,  etc.,  Ry.  Co.  v.  Charlestown " 49 

Middleton  Bank  v.  Magill    147 

Miller   v.    Barber    244 

Miller  v.  Ewer 18,  152 

Miller  v.  Illinois    Cent.    Ry.    Co 179 

Miller  v.  Wild  Cat,  etc.,  Co Ill 

Mills  V.  Northern  Ry.  Co 200 

Mills  V.  Northern,  etc.,  Ry.  Co 125 

Mitchell's    Case    98 

Mitchell  V.  Rubber,  etc.,  Co 123 

Milwaukee,  etc.,  Ry.  Co.  v.  Arms 94 

Mobile  Ry.  Co.  v.  Midland  Ry.  Co 42 

Mokelunine  Hill,   etc.,   Co.   v.    Woodbury 22 

Montgomery  v.   Phillips    171,  208 

Montgomery,  etc.,  Ry.  Co.  v.  Branch 206 

Monument  Nat.  Bank  v.  Globe  Works 69 

Moore  v.  Bank  of  Commerce   187 

Moore  v.   Fitchburg  Ry.   Co 91 

Moore  &  Handley  Co.  v.  Towers  Co 11 

Morgan  v.  Skiddy   176 

Morris  v.   Cheney    187 


TABLE    OF    CASES    CITED. 


PAGE. 

Morris  v.  Staps 75 

Morrison  v.  Gold,  etc.,  Co 245 

Morville  v.  A.  T.  Society  83 

Morrill  v.  Little  Falls  Mfg.  Co 153 

Moses  V.  Tompkins   115 

Moss  V.  Averill    02 

Mnmma  v.  Potomac  Ry.  Co 28,  35,  51,  oo,  206 

Muii^on  V.  Syracuse,  etc.,  R.  Co 167 

Mutual  Fire  Ins.  Co.  v.  Farquhar   157 

Mt.  Holly  Paper  Co.'s  Appeal    185,   187 

Mt.  Pleasant  v.  Beckwith   225 

Mt.  Sterling,  etc.,  Ry.  Co.  v.  Looney    178 

N. 

Nashville,  etc.,  Co.  v.  Nashville   49 

Nas-^au  Hank  v.  Jones   Si 

National   Park  Bank  v.  German,  etc.,  Co 69 

National  Bank  v.  Graham 01 

National  Bank  v.  Matthews    GZ,  65 

National  Bank  v.  Watsonto%\Ti  Bank  182 

Nant-y-Glo,  etc.,  Co.  v.  Graves 242 

Nauney  v.  Morgan 189 

N.  Y.,  etc.,  Bridge   Co.   v.   Smith    54 

N.  Y.,  etc.,  Canal  Co.  v.  Fulton  Bank  70 

N.  Y.,  etc.,  Co.  V.  Boston,  etc.,  Co 42 

N.  Y.,  Lack.  &  W.  Ry.,  In  re   42 

N.  Y.  Mutual  Life  Co.  v.  Willcox    83 

N.  Y;  State,  etc.,  Co.  v.  Helmer   84 

N.  J.  A.  R.,  etc.,  Co.  v.  Newark 62 

Nesmith  v.  Washington  Bank    186 

Newcomb  v.  Reed    22 

New  Albany  v.  Burke   73 

New  Bedford  Ry.   Co.  v.   Old  Colony  Co 225 

New  England  Trust  Co.  v.  Abbott 193 

New  Orleans,  etc.,  Co.  v.  Louisiana,  etc.,  Co 42 

New  Sombrero,  etc.,  Co.  v.  Erlanger 239 

New  York,  etc.,  Ry.  Co.  v.  Haring    86 

New  York,  etc.,  Ry.  Co.  v.  Ketchum    170,  247 

New  York,  etc.,  Ry.  Co.  v.  Schuyler   90,  195 

New  York  v.  Twenty-third  St.  Ry.  Co 35 

Nicoll  v.  N.  Y.  &  E.  Ry.  Co '. 63 

Nix  v.  Miller   .' 169 

Nockels  V.  Crosby    244 

North,  etc..  Assn'  v.  Childs   163 

North  Side  Ry.  Co.  v.  Worthington 230 

No.  Cent.  Ry.*  Co.  v.  Eslow 105 

Nortliwest  Transportation  Co.  v.  Beatty   167 

Northwestern,  etc.,  Co.  v.  Cotton,  etc.,   Co 171 

Northwestern,  etc.,  Co.  v.  Shaw   84 

Norton  v.  National  Bank    178 

Norris  v.  Staps   157 

Noves   v.   Marsh    232 


TABLE    OF    CASES    CITED.  XXlll 

O.  PAGE. 

Oakes   v.    Turquand    113 

O'Brien  v.  Stamback 208 

O'Bear,  etc.,   Co.   v.   Volfer    l'J9,  205 

Ogden   V.   Murray    170 

Ohio,  etc.,  Ky.  Co.  v.  State 231 

Ohio,  etc.,  Ry.  Co.  v.  Wlieeler    19 

Olcott  V.  Tioga  Ry.   Co 68 

Old  Colony,  etc.,  Ry.  Co.  v.  Evans 62 

Oldham  v.  Mt.  Sterling,  etc.,  Co Ill,  113 

Oliver  v.  Gilmore    230 

Omo  V.  Bernart   114 

Oregon  Ry.  Co.  v.  Oregonian  Ry.  Co 82 

Orient  Co.  v.  Daggs   18 

Ormsby  v.  Vermont,  etc.,  Co 152 

Oroville,  etc.,  Ry.  Co.  v.  Supervisors 25 

Osborn  v.  Bank  of  U.  S 45 

Otter  V.  Brevoort  Petroleum  Co 198 

Overton  v.  Memphis,  etc.,   Ry.   Co 136 

P. 

Packard  v.  Old  Colony  Ry.  Co 53 

Paddock  v.    Fletcher    244 

Page  V.  Heineberg    02,  63 

Paine  v.   Barnum    165 

Paine  v.  Stewart   145 

Parish  v.  Wheeler   85 

Park  V.  Granite,  etc..  Works    125 

Parrott  v.  City  of  Lawrence   33 

Passenger  Ry.  Co.  v.  Young   91 

Patterson  v.  Lynde    218 

Paul    V.   Virginia    42,  44 

Pauly  V.  Coronado  Beach  Co 73 

Pearsall  v.  Western  Union  Co 159 

Peek  v.  Gurney    243 

Pendergast  v.  Bank  of  Stockton .  .  ■  184 

Pennsylvania  Co.  v.  Weddle   92 

Penn.  Transportation  Co.'s  Appeal    228 

Penn.  Ry.  Co.  v.  St.  Louis,  etc.,  Ry.  Co 82,  221 

People  V.  Albany 96 

People  V.  Albany,  etc.,  Ry.  Co 97 

People  V.  Anderson,  etc.,  Co 54 

People  V.  Ballard   157,  227 

People  V.  Batchelor 151 

People  V.  Bowen   15 

People  V.  Chicago  Gas  Co 234 

People  V.  Coleman   10,  40 

People  V.  Crockett   182,  184 

People  V.  Ciunmings 151 

People  V.  De  Grauw    226 

People  V.  Equitable  Trust  Co 45 

People  V.  Globe,  etc.,  Co 56 

People  V.  La  Rue    62 

People  V.  Manhattan    Co 53 


Xxiv  TAliLK    (»1'    CASES    CITED. 

FAOB. 

i'eojilc  V.  Mauran    *J3 

IVojilc's  Mutual   ills'.  Co.  V.  VVescott 115 

IVcpli-  V.  N.  V.  C,  etc.,  Ky.  Co 53 

IVople  V.  New  York,  etc.,  Ky.  Co 10 

I'.opli'  V.   North    Uiver,   etc 22i 

I'coiiU-  V.   North  Hiver  Sugar  Kef.  Co 222,  234 

IVople  V.  0"15rien   30 

reojile  V.  Pullniau  I'ahice  Car  Co 03 

IVoplu  V.  Selfridge 10,     22 

People  V.  Supervisors 125 

IVople  V.  Tliroop 180 

I'eople  V.  Township  Board    107 

lVoi)le  V.   Water    Co 22 

I'eoria,  etc.,  Co.  v.  Coal,  etc.,  Co 223 

I'eny  v.   .Millaudon    165 

Perriii  v.  Granger    140 

IVrrv  V.  Tuscaloosa,  etc.,  Co 17G 

I'eter  v.   Cnion  Co 215 

Pew  V.  Gloucester  Bank  170 

I'fohl   V.   Simpson    217 

I'iielan  v.  Hazard   140 

Phillips  Acad.  v.  King   04,     70 

Phillips  V.  Wickham   121 

Phihul«'l|)hia,  etc.,  Ry.  Co.  v.   Conway    109 

Piiiladelphia,  etc.,  Ry.  Co.  v.  Derby   92 

Phila(leli)liia.  etc.,  Ry.  Co.  v.  Maryland    221 

IMuenix  \\"a rehousing  Co.  v.  Badger   114 

Phosphate,  etc..  Co.  v.  Harmont    240 

I'ick  V.  Kllinger   69 

Pickering  v.  Stephenson  164 

Pierce   v.    Com 120 

Pierson  v.  liank  of  Washington 187 

Pittsljurgh,  etc.,  Ry.  Co.  v.  Biggar   109 

Pittsi.urgh,  etc.,  Rv.  Co.  v.  Clarke 182,   185,   186 

Pittsburgh,  etc.,  Ry.  Co.  v.  Gazzam 107 

Pittsburgh,  etc.,  Ry.  Co.  v.  Keokuk  Bridge  Co 82 

Pittsburgh,  etc.,  Co.   v.   Spooner    240 

Pittsburgh,  etc.,  Ry.  Co.  v.  Stewart 108 

Planters'  Ins.  Co.  v.  Selma  Bank 185 

Piatt  V.   I^iriningham,  etc..   Co 185 

IMaquciuincs.  etc.,  Co.  v.  Buck   238-230 

Plymouth,  etc.,  Ry.  Co.  v.  Colwell    206 

Pneumatic  Gas  Co.  v.  Berry   107 

Pollak  Co.  V.  Muscogee  Co 209 

Pond  V.  l-'ramingham.  etc..  Rj'.  Co 200 

Pon<lville  Co.  v.  Clark 148 

I'ort  V.  Russell   166 

Potter  V.  Dear    217 

Potts  V.  Delaware,  etc.,  Co 25 

Pratt  V.  Short 84 

President,  etc.,  ^fanhattan  Co.  v.  Kaldenberg   172 

I'rice's  Appeal    110 

Providence  Bank  v.   Billings    33 

Providence  Ins.  Co.  v.  Mass   145 


TABLE    OF    CASES    CITED.  XXV 


PAGE. 

Providence  Tool  Co.  v.  Norris   84 

PuUan  V.  Cincinnati,  etc.,  Co 210 

Pullman  v.  Stebbins   208 

Pullman  v.  Upton 196 

Pulsford  V.  Richards Ill 

Putnam  v.   Rubicon    167 


Q. 

Queen  City,  etc.,  Co.  v.  Crawford  248 

R. 

Rabe  v.  Dunlap    222 

Racine,  etc.,  Co.  v.  Farmers,  etc.,  Co 228 

Railroad  Commission   Cases    39 

Railroad  Co.  v.  Ellerman   87 

Railway  Co.  v.  Gibbs   18 

Railroad  Co.  v.  Howard  206 

Railway,  etc.,  Co.  v.  Lincoln  Nat.  Bank   177 

Railway  Co.  v.  Mackay    IS 

Rapid  Transit  Ferry  Co.,  Re   153 

Ratcliffe's   Case    64 

Rathbun  v.  Snow 177 

Reading,  etc.,  Co.  v.  Reading  Iron  Works    132,  229 

Reed  v.  Copeland 188 

Reed  v.  Home  Savings  Bank    02 

R,eed  v.  Northwestern  Ry.  Co 97 

Reese  v.  Bank  of  Commerce 187 

Regan  v.  Farmers,  etc.,  Co 39 

Regina  v.  Bradford,  etc.,  Co 97 

Reg.  v.  Great  No.,  etc.,  Ry.  Co 97 

Rehoboth  v.  Carpenter   63 

Reichwald  v.  Com.  Hotel  Co 54 

Reid  V.  Eatontoa  Mfg.  Co 144 

Relfe  V.  Rundel    175 

Rensselaer  Ry.  Co.  v.  Davis   62 

Republic,  etc.,  Co.  v.  Pollak  49 

Rex  V.  Westwood  17 

Reynolds  v.  Commissioners   62 

Rice  v.   National  Bank    52 

Richardson  v.  Baldwin 24 

Richardson  v.  Green 215 

Richmond  v.    Irons    197 

Rider  v.   Fritchey    146 

Ridgefield,  etc.,  Ry.  Co.  v.  Brush    107 

Rivanna  Nav.  Co.  v.  Dawson   72 

Rives  V.  Montgomery,  etc.,  Co 115 

Roane  Iron  Co.  v.  Wisconsin  Trust  Co 70 

Roberts'  Appeal   189 

Roberts,  etc.,  Co.  v.  Schlick   248 

Rochester,  etc.,  Ry.  Co.  v.  New  York,  etc..  Ry.  Co 97 

Rogers  v.  Nashville,  etc.,  Ry.  Co 120 

Rogers  v.  New  York,  etc.,  Co 246 


XXVI  TABLE    OF-    CASES    CITED. 

PAGE. 

Rollins  V.  Shaver,  etc.,  Co 172 

Root  V.  Codard   09,  84,  80 

Root  V.  Sinnock 147 

Ross  V.  Madison    9;j 

Rouse  V.  Merchants,  etc..  Bank  20!) 

Rush  V.  Steamboat  Co 27 

Russell  V.  Texas    05 

Rutland,  etc.,  Ry.  Co.  v.  Thrall   115 

S. 

St.  Albans  v.  Car  Co 49 

St.  John,  etc.,  Co.  v.  Munger   Ill,  113 

St.  Lawrence,  etc.,  Co.,  In  re   121,  100 

St.  Louis  V.   Weber    7  S 

St.  Louis,  etc.,  Ry.  Co.  v.  Tiernan  241 

St.  Peter's,  etc.,  Cong.  v.  Germain   62 

St.  Peter's,  etc.,  Church  v.  Gerniauia    00 

Sabin  v.   Bank    182,  185 

Safety,  etc..  Co.  v.  Smith 247 

Sage  V.  Diilard    .34 

Sage  V.  Lake  Shore,  etc.,  Ry.  Co 12.3 

Salem  Rubber  Co.  v.  Adams  244 

Salem,  etc.,  Co.  v.  Ropes   Ill,  115 

Santa  Cruz  Ry.  Co.  v.  Schwartz 107 

Samuels  v.  Evening  Mail  Co 91 

Santa  Cruz  Ry.  Co.  v.  Spreckles 116 

Saranac,  etc.,  Ry.  Co.  v.  Arnold 100 

Sargent  v.  Webster   213 

Sawyer  v.  Hoag   219 

Scadden.  etc.,  Co.  v.  Scadden   247 

Sciiludcr  v.  Dielman 50 

Sduifeldt  v.  Smith   172 

Scripture  v.  Francestown  Soapstone  Co 191,  19i) 

Scott  V.  De  Peyster   103,  100 

Scoville  v.  Thayer  148 

Searight  v.   Payne    87 

Second  Nat.  Bank  v.  Hall   87 

Sewall  V.  Lancaster  Bank   187 

Shanklin   v.   Gray    172 

Shaw's  Claim,  Re   245 

Shaw  V.  Little  Rock,  etc.,  Ry.   Co 228,  229 

Shaw  V.  Norfolk  Ry.,  etc.,  Co 25 

Shaw  V.  (,)uincy  Mining  Co 20 

Shea  V.   Mabry    109,  201 

Sheilington  v.  Rowland    107 

Shopaug  Voting  Trust  Cases 231 

Sherman   v.   Fitch    173 

Shibley  v.  Anglo    103 

Shurtz  V.  Sclioolcraft.  etc..  Ry.  Co 100 

Sil)1oy  V.  Quinsigamond  Bank   197 

Siege!  v.  Andrews    218 

Silver  Lake  Bank  v.  Nortli    (i2 

Simons  v.  Vulcan  Oil  Co 239 


TABLE    OF    CASES    CITED, 


PAGE. 

Sinclair  v.  Fuller 173 

Singer  Mfg.  Co.  v.  Holdfodt  95 

Slack  V.   Bank    200 

Slaughter-House  Case   38 

Slee  V.  Bloom 143 

Slocum  V.  Piper  Co 27 

Smith  V.  Hurd   124,  168 

Smith  V.  Parker 248 

Smith  V.  Prattville  Mfg.  Co 131 

Smith  V.  San  Francisco,  etc.,  R\.  Co 2C1 

Smith  V.  Smith ' 159,  178 

Smith  V.  Sheeley   26 

Smith  V.   Skeary 167 

Smith  V.   Silver  Mining  Co 18,  19 

Smith  V.  South   Royal   Bank    179 

Snow  V.  Church   232 

Society,  etc.  v.  Coite 45 

SodusBay,  etc.,  Ry.  Co.  v.  Hamlin   107 

Southwestern  Ry.  Co.  v.  Thomason   128 

Spering's  Appeal    164 

Springer,  etc.,  Co.  v.  Smith   95 

Spurlock  V.  Pacific  Ry.  Co 184 

Squair  v.  Lookout  Mt.  Co 136 

State  V.  Atchison   97 

State  V.  Baltimore,  etc.,  Ry.  Co 97 

State  V.  Citizens'    Bank    .  * 123 

State  V.  Con.   Coal   Co 41 

State  V.  Dawson 17,  23 

State  V.  Epstein 122 

State  V.  First  Nat.  Bank    97 

State  V.  Georgia  Ry.  Co 48 

State  V.  Howard    25 

State  V.  McDaniel   160 

State  V.  Maine,  etc..  Ry.  Co 221 

State  V.  Morris,  etc.,  Ry.  Co 96 

State  V.  ^lorristown  Fire  Ass.  Co 116 

State  V.  Murfreesboro    97 

State  V.  N.  R.  Sugar,  etc.,  Co 51,  71 

State  V.  Passaic,  etc..  Society    97 

State  V.  Pawtuxet    Co 52 

State  V.  Portland   96 

State  V.  Sibley 105 

State  V.  Standard   Oil   Co 234 

State  V.  Stocklev    120 

State  Trust  Co.  v.  Turner   217 

State  V.  Turnpike    Co 53,  54 

State  V.  Vermont  Cent.  Ry 97 

Stafford  v.  Produce  Exch.  Bank 193 

Stanhope's    Case    140 

Stanton  v.  Xew  York,  etc.,  Ry.  Co 247 

Starrett  v.  Insurance  Co 104 

Starritt  v.  Rockland,  etc..  Ins.  Co 102 

Steamship  Dock  Co.  v.  Heron's  Adnir 183 


TABLE    OF    CASES    CITED. 


PAGE. 

Stebbins  v.  Merritt   151 

ytebbins  v.   Phienix   Ins.  Co 185,  18G 

Steinway,  In  re 122,  12.'i 

iSteinway  v.  Steinway 63 

ytcrnberg  v.   Wolff    137 

Stevens  v.   Kden,  ete.,  Society    151 

Stevens  V.   Rutland,  etc.,   Ry.   Co 155,  224 

(Steven.s  v.  Soutli  (.)fj:den,  etc.,  Co 137 

Stewart  v.  Lehigh  Valley  R.  Co 167 

Stine  V.  Howard    215 

Stockton,  etc.,  Co.  v.  Stockton   42 

Stone  V.  Miss 37,  38,  44 

Stoneham,  etc..  Ry.  Co.  v.  Gould   110 

Strowbridge  Can.  Co.  v.  Wheeling   32 

Sturges  V.  Vanderbilt   54 

Sutton   Hos])ital   Case    6,  7 

Supply  Ditch  Co.  v.  Elliott   101 

Susquehanna,  etc.,  Co.  v.  Elkins    158 

Sutherland  v.  Olcott 72 

Sutton  V.  Cole    62 

Swentzel   v.   Penn   Bank    163,  169 

Swift  V.  Pacific  Mail  Co ■ 71,  230 


T. 

Talbot  V.  Hudson " 42 

Talniage  v.  Pell   74 

Tappan  v.  Merchants'  Rank    49 

Tate  V.  Association   209 

Tawas,  etc.,  Ry.  Co.  v.  Circuit  Judge   226 

Taylor  v.   Karle    157 

Tavlor  v.  Holmes 136 

Taylor  v.  C.  &  M.  Ry 81 

Teachout  v.  \'an  Hoesen    243 

Telfair  v.  Howe   63 

Tel.  Co.  V.  Texas    45 

Tennant  v.   Appleby    171 

Terhuiu*  v.  Midland  Ry.  Co 223 

Terret  v.  Taylor    51 

Terry  v.  J>ittle    145 

Thayer  v.   Boston    95 

Thebus  v.  Smiley   148 

The  Bank,  etc.,  v.  Niles   85 

The  Phosphate,  etc.,  Co.  v.  Green   73 

The  State  v.  Morristown  Fire  Assn 100 

Thoma.s  v.  Brown ville,  etc.,  Ry.  Co 166 

Thomas'  Admr.   v.  Lewis    188,  189 

Thomas  v.  Dakin 7 

Thomas  v.  Railway   Co 59,  82 

Thomas  v.   West  Jersey  Ry.  Co 85,  230 

Thompson  v.  Greely    163,  164 

Thompson  v.  People   16 

Thornton  v.  Marginal,  etc.,  Ry.  Co 200 


TABLE    OF    CASES    CITED.  XXIX 


PAGE. 

Thornton  v.  Wabash  Ry.  Co 22i) 

Thrasher  v.  Pike  County  Ry.  Co lO^:! 

Throop  V.  Hatch  Lith.  Co 171 

Thrope  v.  Railway  Co 38 

Tift  V.  Quaker,  etc..  Bank   245 

Tisdale  v.   Harris    191 

Titonic,  etc.,  Co.  v.  Lang   107 

Titus  V.  Cairo,  etc.,  Ry.  Co 177 

Titus  V.  Railway    Co H^*" 

Tod  V.  Kentucky  Union  Land  Co 69 

Tome  V.  Parkersburg,  etc.,  Ry.  Co 159 

Tomlinson  v.  Bricklayers'  Union    11 

Tompkins  Co.  v.  Catawba  Mills   137 

Tomkinson  v.  Southeastern  Ry.  Co 155 

Tonawanda,  etc.,  Ry.  Co.  v.  New  York,  etc.,  Ry.  Co 230 

Toner  v.  Fulkerson   140 

Townes  v.  Nichols   193 

Townsend,  Re   42 

Trade,  etc.,  Co.  v.  Vickers   137 

Tradesman  Pub.  Co.  v.  Wheel  Co 209 

Treadwell  v.  Salisbury  Co 150,  223 

Tregear  v.  Etiwanda  W^ater  Co 100 

Trenton  Potteries  Co.  v.  Oliphant   230 

Trott  V.  Sarchett   107 

Trust  Co.  V.  Lee   70 

Tucker  v.   Gilman    138 

Tucker  v.   Ferguson    43 

Turner  v.  Granger   113 

Twin-Lick  Oil   Co.  v.  Marbury    163 

U. 

U.  S.  Express  Co.  v.  Ellyson   49 

U.  S.  Rubber  Co.  v.  American,  etc.,  Co 209 

United  States  v.  Addyston,  etc.,  Co 234 

United  States  v.  Trans-Missouri  Freight  Assn 230 

Union  Bank,  etc.,  v.  State    48 

Union  Bank,  etc.,  v.  Laird 197 

Union  Bank  v.  Laird   186 

University  v.  People   18 

Upton  V.  Hansborough ]  O.S 

Upton  V.  Tribilcock    Ill,   112,   113,   142,  213 


V. 

Van  Cott  V.  Van   Brunt    215 

Van  Dyck  v.  McQuade   128 

Van  Sands  v.  Middlesex,  etc..  Bank   ISi,   183,   193 

Vance  v.  Erie  Ry.  Co 92 

Vance  v.  Insurance  Co 103,   104 

Vanderpoel  v.  Gorman   209 

Vercontre  v.  Golden,  etc.,  Co 157 

Vidal  V.   Girard    64,     70 


XXX  TAULK    OK    CASES    CITED. 

PAGE. 

Visalia.  etc.,  Co.  v.  Sims    84 

Vose  V.  Grant    109 

VrtH'land  v.  N.  J.  Stone  Co 107 

W. 

Wabash,  etc.,  Ry.  Co.  v.  Ham 207 

\\alk('r  v.  Joseph,  etc.,  Co 1S9 

Wallace  v.   Inliabitants,  etc.,  in  Townsend \~y,i 

Wallace  v.  Townsend    lO-t 

Wallshire   Iron   Co.,  Re 55 

Walsh  V.  Sexton    1H9 

Walworth,  etc..  Bank  v.   Farmers'  Loan,  etc.,  Co 178 

Ward  V.  Griswoldville,  etc.,   Co 143 

Warner  v.  Penoyer 1G5 

Warner  v.  Seymour    244 

Warren  v.  Robinson    16.3 

Washburn  v.  National,  etc.,  Co 215 

Water   Co.   v.   darken    65 

Weatherford,  etc.,  v.  Granger  247 

Webster  v.  Upton    190 

Webster  v.  Howe  Machine  Co 69 

Wells   V.    Stout    14S 

West  V.   Camden    232 

West  River  Bridge  Co.  v.  Dix 40 

West  Wisconsin  Ry.  Co.  v.  Board  of  Supervisors   48 

Western  Union  Ry.  Co.  v.  Smith   225 

Western,  etc.,  Co.  v.  Cawsley   247 

Wheeler  v.  Aiken,  etc.,  Bank   165 

Wheeler  v.  Miller    148 

Wheeler  v.  Northwestern  Co 129 

Wliite  v.   Franklin  Bank    84 

White  v.  Howard    64 

White  Water,  etc.,  Co.  v.  Vallette   59 

Whitnev  Arms  Co.  v.  Barlow   83,     SO 

Wliittefton  Mills  v.  Upton    71,  221 

Whitwell   v.  Warner    141,  213 

Wigf,Mns,  etc.,  Co.  v.  Chicago,  etc.,  Ry.  Co 230 

Wilbur  v.  LjTide    106 

Williams  v.  Boice   144 

Williams  v.  Guile   188 

Williams  v.  Hanna 147 

Williams  v.  McKav    164,   165 

Williams  v.  Montgomery    193.  231.  232 

Williams  v.  Page    245 

Williamson  v.  Smoot    11 

Williams  v.  Tavlor 114 

Williams  v.  Western  Union  Tel.  Co 130 

Winrham,  etc.,  Co 16S 

Winget  V.  Quincy,  etc.,  Co 26 

Winters  v.  Hub,  etc.,  Co 246 

Witters  v.  Sowles    148 

WoodruflF  V.  Erie  Ry.  Co 221 

Wood  V.  Dummer  '. 142,  144,  206 


TABLE  OF  CASES  CITED.  XXXI 


PAGE. 

Worthen  v.   Griffith    205 

Wright  V.  Bank  of  Metropolis   197 

Wright  V.  Hughes (57 

Wright  V.  Pipe  Line  Co 86 

Wyetli  Co.  V.  James  Co 53 

Y. 

Yale  Gas  Co.  v.  Wilcox   239 

Yates  V.  Van  De  Bogert 63 

Young  V.  Vough   182,  185 

Z. 

Zabriskie  v.  Baldwin   33 

Zabriskie  v.  Hackensack,  etc.,  Ry.  Co 155 


A  SUMMARY  OF  THE  LAW  OF  PRIVATE 
CORPORATIONS. 


CHAPTEK  I. 


§  1.  History. —  The  origin  of  the  idea  of  a  corpora- 
tion is  a  mooted  question.  Sir  Henry  Maine  insists  that 
the  idea  of  clans  or  organized  bodies  existed  and  were 
recognized  before  the  individuaL  Blackstone  sajs  the 
idea  originated  with  the  Romans,  while  Angell  and 
Ames  say  it  originated  with  the  Greeks. 

Be  that  as  it  may,  the  generally  accepted  statement 
is  that  our  present  law  of  corporations  is  traceable  in 
unbroken  line  to  the  Romans.  Saviguy,  who  has  writ- 
ten the  best  account  of  Roman  corporations,  says  that 
villages  and  towns  were  the  earliest  forms  of  the  cor- 
poration. Later  the  idea  extended  to  the  State  and 
then  to  brotherhoods.  The  basis  of  all  was  community 
of  interests.  The  first  idea  was  for  protection  from  the 
outside  world.  This  being  secured,  protection  from 
themselves,  resulting  in  peace  and  order,  made  popular 
the  municipal  corporation  idea,  and  the  practical  work- 
ings of  this  new  idea  being  found  satisfactory  it  gradu- 
ally extended  to  the  formation  of  the  brotherhoods. 
The  associated  artisans  of  Rome  were  followed  by  the 
bakers,  the  boatmen,  and  many  others.  It  is  interest- 
ing to  note  that  in  these  business  associations  the  con- 
sent of  the  State  was  necessary;  that  three  members 
at  least  were  necessary  for  formation,  though  not  for 
existence,  and  that  the  rights  and  duties  corresponded 
closely  to  those  of  an  actual  person.    When  Christianity 

[1] 


ii  SUM^[AKY    OF    LAW    OF    PRIVATE    COErORATIONS. 

was  introchic'i'd,  tho  C'liurcli  found  nunicroiis  ways  to 
ap[)ly  tilt'  various  (lootrincs  now  existent,  and  through 
tlio  Church  and  its  officials  they  were  brought  into  Eng- 
land, where  they  were  applied  to  the  societies  already 
existing,  and  thereafter  strongly  influenced  the  laws  of 
that  country. 

The  earliest  corporations  in  England  were  the  peace- 
guilds,  formed  for  mutual  protection.  Following  these 
—  and  born  of  their  experience  —  came  the  municipal 
corporation,  followed  in  turn  by  the  craft-guilds.  Of 
these  latter,  many  now  in  existence  trace  their  origin  to 
the  earliest  times.  The  first  of  them  was  the  weavers, 
formed  about  1300.  This  was  followed  in  succession 
by  the  goldsmiths  in  1327,  the  mercers  in  1373,  the 
haberdashers  in  1407,  the  fishmongers  in  1433,  the 
vinters  in  1437,  and  the  merchant  tailors  in  146G.  fn 
the  sixteenth  century  new  discoveries  led  to  the  incorpo- 
ration of  companies  for  foreign  adventures,  the  chief 
object  being  not  so  much  the  convenient  prosecution  of 
business,  but  for  the  purpose  of  public  agency,  to  which 
was  confined  the  due  regulation  of  trade.  "  The  gen- 
eral intent  and  end  of  all  corporations  is  for  better  gov- 
ernment, either  general  or  special.  The  corporations 
for  general  government  are  those  of  cities  and  towns, 
mayor  and  citizens,  mayor  and  burgesses,  mayor  and 
commonalty.  Special  government  is  so  called  because  it 
is  remitted  to  the  managers  of  particular  things,  as 
trade,  charity,  and  the  like,  for  government,  whereof 
several  corhpanies  and  corporations  for  trade  were 
erected,  and  several  hospitals  and  houses  for  charity."  * 

The  earliest  of  these  companies  were  the  African, 
the  Russian,  and  the  Turkey  companies.  In  1600  was 
formed  the  famous  East  India  Company,  followed  later 
by  the  Royal  African  and  the  Hudson's  Bay  Company. 
At  this  time  the  advantages  of  corporate  enterprise, 

1.  "The  Law  of  Corporations,  1702,"  Anonymous. 


INTRODUCTION. 


i.  e.,  the  government  of  trade,  together  with  aggregation 
of  capital  and  distribution  of  profits,  led  to  the  later  and 
larger  corporations.  In  1692  came  the  Greenland  Com- 
pany, followed  by  the  Bank  of  England  in  1G94,  the 
latter  being  an  idea  to  raise  money  for  governmental 
purposes.  Now  followed  a  jDeriod  of  wild  speculation, 
in  which  over  200  companies  were  created,  many  with- 
out governmental  license. 

In  1720  the  government  began  to  issue  writs  of 
scire  facias  to  inquire  into  their  rights  to  do  business, 
and  this  not  only  put  a  stop  to  the  creation  of  companies 
but  brought  on  a  collapse,  which  left  only  four  com- 
panies in  existence.  So  great  was  the  distrust  that  the 
great  economists  of  the  day,  notably  Adam  Smith,  de- 
clared that  corporations  should  exist  only  for  the  greater 
undertakings  of  a  public  kind,  such  as  banking,  insur- 
ance, canals,  water  companies,  etc.,  for  they  required 
greater  capital  than  could  be  commanded  by  private 
concerns.  During  the  later  part  of  the  eighteenth  cen- 
tury they  began  to  increase,  though  their  progress  was 
slow,  and  so  continued  until  the  introduction  of  gas  and 
railroads. 

Only  one  corporation  was  created  in  America  prior  to 
the  Declaration  of  Independence.  "  The  Philadelphia 
Society  for  Insuring  Houses  from  Loss  by  Fire  "  was 
created  in  1752  and  chartered  in  1768.  In  1781  Con- 
gress chartered  the  "  Bank  of  ISTorth  America  "  (Phila- 
delphia), in  1784  the  "Massachusetts  Bank,"  in  1785 
the  "  Charles  River  Bridge  Company,"  and  in  1786  the 
"  Mutual  Assurance  Company  of  Philadelphia."  The 
first  New  York  corporation  was  chartered  by  Congress 
in  1786  —  "  The  Associated  Manufacturing  Iron  Com- 
pany of  New  York." 

With  the  development  of  the  corporation  through  its 
various  phases  here  outlined  the  law  has  kept  stride. 
The  first  corporation  laws  were  municipal  in  their  char- 


4  SUMMARY    OF    LAW    OF    PKIVATE    CORPOKATIONS. 

acter.  When  business  corporations  came  into  existence 
—  and  there  being  no  laws  in  force  governing  them  — 
these  municipal  rules  were  used  in  so  far  as  they  were 
found  applicable  and  new  rules  were  added  as  the  exi- 
gency of  the  time  demanded.  For  this  reason  the  law 
of  private  corporations  is  neither  consistent  or  logical. 
Several  features  of  the  early  Roman  law  exist,  modified 
and  increased  by  the  later  common  law  of  England, 
which  in  turn  has  been  modified  and  enlarged  by  the 
statutory  law  of  our  various  States.  It  is  a  familiar 
statement  therefore,  that  the  Law  of  Private  Corpora- 
tions consists  of  the  early  common  law  created  for  the 
government  of  municipal  corporations,  and  modified 
and  enlarged  by  statute  both  in  England  and  America, 
to  meet  tlie  requirements  of  our  later  development. 
Where  statute  does  not  apply  the  common  law  still 
obtains.  While  it  is  true  that  the  law  is  largely  statu- 
tory to-day  there  is  no  subject  in  the  law  where  so  great 
a  conflict  in  the  decisions  are  to  be  met  with ;  but  while 
the  law  is  unsettled  on  many  points,  there  are  more 
points  on  which  it  is  settled,  and  thus  is  made  practi- 
cable a  general  conception  of  the  law  relating  to  private 
corporations. 

§  2.  General  divisions. —  Corporations  are  generally 
divided  into  two  classes:  (1)  Aggregate  —  composed 
of  a  number  of  individuals;  (2)  sole  —  a  single  in- 
dividual. A  familiar  illustration  of  the  latter  is  that 
of  a  bishop  of  a  diocese. 

Corporations  sole  are  rare  in  America.  Corporations 
aggregate  are  divided  into:  (1)  Public  corporations, 
or  such  as  are  formed  to  promote  public  objects,  as 
towns,  counties,  cities,  states,  etc.;  (2)  private  corpo- 
rations, or  corporations  created  by  private  individuals 
to  promote  and  prosecute  private  enterprises.  Private 
corporations  are  again  divisible  into:  (1)  Business  or 
trading  corporations;     (2)    ecclesiastical  corporations, 


INTRODUCTION.  5 

which,  as  such,  are  not  known  in  America,  though  com- 
mon in  England;  and  (3)  charitable  corporations; 
■within  the  last  classification  may  be  embraced  member- 
ship corporations,  eleemosynary,  religious,  and  social  in- 
stitutions generally. 

A  class  of  corporations  exists  which  in  fact  lies  be- 
tween the  public  and  the  private  corporation.  This  in- 
stitution is  known  as  the  quasi-imblic  or  public  service 
corporation.  It  is  created  by  private  individuals  for 
private  gain,  with  the  object  and  purposes  of  promoting 
some  public  enterprise.  Such  institutions  are  railroads, 
canals,  transportation  lines,  gas  companies,  turnpike 
companies,  etc.  These  institutions  are  governed  by  the 
law  affecting  private  business  corporations,  the  only  dis- 
tinction being  that  when  a  dispute  arises  between  such 
a  quasi-public  corporation  and  the  public,  the  law  con- 
strues its  rights  and  liabilities  more  strictly  and  ahvays 
more  favorable  to  the  public. 

Limited  company. —  This  term  is  frequently  used, 
and  especially  in  England  is  the  word  limited  placed 
after  the  name  of  the  company.  When  used  by  a  cor- 
poration it  means  that  the  liability  of  each  shareholder 
is  limited  by  the  number  of  shares  he  has  taken,  so 
that  he  cannot  be  called  upon  to  contribute  beyond  the 
amount  of  his  shares.  In  England  as  well  as  in  the 
United  States  the  articles  of  association  may  provide 
that  the  liability  of  the  shareholders,  officers,  and  man- 
agers may  be  unlimited.  The  rule  differs,  however, 
for  in  England  the  word  "  limited  "  must  be  contained 
in  the  articles  of  incorporation,  otherwise  a  full  lia- 
bility corporation  will  be  presumed,  w^hile  in  the  United 
States  a  limited  liability  company  is  presumed  unless 
the  articles  of  incorporation  contain  provisions  to  the 
contrary. 

j^o  attempt  will  be  made  in  these  pages  to  treat  of 
other  than  the  private  business  corporation.     It  will  em- 


C  bLMMAKV    OF    LAW    OF    PRIVATE    COKrOEATIONS. 

brace  the  general  law  applicable  to  stock  corporations, 
business  corporations,  and  quasi-public  corporations. 

Some  of  the  State  statutes  divide  corporations  in  this 
way,  and  it  may  be  of  importance  to  make  this  inclusive 
statement,  that  the  reader  may  properly  appreciate  the 
sco])e  and  character  of  the  work. 

^  ;3.  Definition. — A  corporation  is  a  legal  entity. 
"  To  frame  a  definition  of  any  legal  term  which  shall 
be  both  i:)ositively  and  negativ'ely  accurate,  is  possible 
only  to  those  who,  having  legislative  authority,  can 
adapt  the  law  to  their  ow^n  definition."  ^  The  wisdom 
of  many  text-writers  and  numerous  decisions  of  courts 
both  in  England  and  the  United  States  have  furnished 
a  mass  of  definitions  of  a  corporation  out  of  Avhich  one 
may  take  his  choice  and  not  be  far  out  of  the  way.  All 
are  more  or  less  cumbersome,  however.  In  framing  a 
definition  but  one  idea  should  be  kept  in  mind  —  how 
shall  we  distinguish  tlie  institution  from  others  of  a 
similar  nature  and  do  it  in  the  fewest  words  possible? 
A  comparison  of  the  many  definitions  used  will  show 
that  all  agree  on  at  least  two  points  —  the  corporation 
must  be  legal,  i.  e.,  exist  by  sanction  of  the  government, 
and  its  members  combined  into  an  artificial  unity  or 
entity."^  The  older  writers  seem  to  have  agreed  in  de- 
fining a  corporation  by  means  of  its  faculties  and  pow- 
ers, asserting  that  five  general  powers  must  exist  in 
order  to  have  a  corporation,  to  wit:  (1)  The  power  of 
succession,  whereby  the  members  elect  or  appoint  their 
successors ;  (2)  the  power  to  sue  and  be  sued  in  the  name 
of  tlie  corporation;  (3)  the  right  to  purchase  and  hold 
real  estate  and  personal  property;  (4)  the  right  to  enact 
by-laws  for  the  government  of  the  corporation  in  its 

2.  Lindley  on  Partnprship,  p.  1. 

3.  Soo  definitions  of  Blarkstone  and  Kent.  Also  1  Kvd,  13; 
Aneoll  &  Amos  (llth  od.) .  1:  Marshall.  C.  J.,  in  Dartmouth  Col- 
lepo  Case,  4  Whont.  63fi;  Toko,  in  Sutton  Hospital  Caso.  10  Repta. 
28 ;  Senator  Hand,  in  GiflFord  v.  Livingston,  2  Denio.  295. 


I 


INTRODrCTIOISr.  7 

dealings  with  its  own  members;  and  (5)  the  right  to 
have  a  common  seal.  "  Some  of  these  are  of  trifling 
importance.  The  essence  of  a  corporation  is:  (1)  Per- 
petual succession  under  a  special  name  and  in  an  arti- 
ficial form ;  ( 2 )  the  power  to  take  and  grant  property, 
contract  obligations,  sue  and  be  sued  by  its  corporate 
name  as  an  individual;  and  (3)  to  receive  and  enjoy 
in  common  grants  of  privileges  and  immunities."  ^ 

'No  particular  form  of  words,  in  fact  no  express 
words  are  necessary  to  create  a  corporation.^  "  If  in- 
tent be  evident,  it  is  enough."  ^  While  this  is  true,  there 
must  be  some  way  of  ascertaining  the  faculties  enjoyed 
by  the  corporation,  and  these  being  present,  will  deter- 
mine the  nature  of  the  institution  irrespective  of  any 
name  which  may  be  conferred  upon  it  or  in  use  by  it.^ 
These  faculties  may  be  more  or  less,  as  the  grant  of  the 
government  be  specific  or  general,  but  in  general  may  be 
gathered  from  an  inquiry  into  three  particulars : 
(1)  Where  is  the  title  to  the  property?  (2)  Who  acts? 
(3)  Where  does  the  liability  rest — on  the  company  or  on 
the  members  individually  ?  If  directly  or  by  implica- 
tion it  can  1)6  shown  that  the  title  to  the  property  is 
vested  in  the  company,  as  a  company;  that  it  is  the 
company  which  acts,  makes  contracts,  incurs  liabilities, 
etc.,  and  that  the  individuals  who  compose  the  company 
are  not  liable  individually  for  its  debts  or  obligations, 
then  the  institution  is  a  corporation ;  provided,  always, 
that  there  be  present  the  governmental  sanction,  either 
express  or  implied. 

§  4.  The  corporation  vs.  partnership. — ''A  partnership 
is  a  voluniary  contract  between  two  or  more  persons 
for  joining  together  their  money,  goods,  labor,  and  skill, 
or  any  or  all  of  them,  in  some  lawful  commerce  or  busi- 

4.  Thomas  v.  Dakin,  22  Wend.  9. 

5.  Conservators  of  River  Tone  v.  Ash,   10  Barn.  &  Cress.  349. 

6.  Sutton  Hospital  Case,  10  Coke's  Reports,  28. 

7.  Liverpool  Ins.  Co.  v.  Mass.,  77  U.  S.  566. 


8  SUMMARY    OF    LAW    OF    PKIVATE    CORPORATIONS. 

ness,  imdor  an  iinclerstanding  express  or  implied  from 
the  nature  of  the  enterprise,  that  there  shall  be  a  com- 
munion of  profits  and  loss  between  them."  * 

Under  the  common  law  there  were  five  fundamental 
differences  between  a  corporation  and  a  partnership: 
(1)  A  partnership  is  not  an  artificial  person;  (2)  a 
chann:o  of  partners  dissolved  the  firm  ;  (3)  partners  were 
individually  liable  for  the  debts  of  the  firm;  (4)  each 
partner  was  the  agent  of  the  other  in  respect  to  the 
partnership  business;  and  (5)  a  partnership  required 
no  special  sanction  for  its  existence. 

Not  all  of  these  differences  exist  to-day,  though  three 
of  them  remain  true  in  their  entirety.  That  a  partner- 
ship is  not  an  artificial  person  —  in  other  words,  an 
entity  —  has  been  disputed  by  many  learned  jurists 
and  writers  of  modern  days.  A  discussion  of  the  ques- 
tion is  not  necessary  here,  for  the  reason  that  even  if  it 
be  true,  and  this  distinction  between  a  partnership  and 
a  corporation  be  cast  aside,  the  differences  remaining 
are  radical  enough  to  answer  all  purposes.  It  is  sub- 
mitted, however,  that  the  weight  of  authority  to-day  is 
against  the  entity  theory  of  a  partnership. 

So,  too,  of  the  distinction  that  a  partnership  does  not 
require  a  special  sanction  for  its  existence.  Neither  does 
a  corporation,  if  the  matter  come  to  a  question  of  hair 
splitting.  Corporations  to-day  are  usually  created  un- 
der general  laws,  and  the  statutes  of  most  of  the  States 
contain  partnership  acts  specifying  how  they  may  be 
created.  "  No  legal  institution  exists  save  through  the 
sanction  or  operation  of  the  rules  of  law  of  which  it  is 
a  manifestation."  ^ 

Generally  speaking,   three   differences   exist  to-day: 

First.  No  partner  can  retire  from  the  partnership,  ex- 
cept by  mutual  consent,  without  dissolving  the  partner- 

8.  Lindley  on  Partnership,  p.  5. 

9.  Taylor  on  Corporations,  p.  37. 


J 


I 


INTEODUCTION.  9 

ship,  while  in  a  corporation  the  right  of  shareholders  to 
transfer  their  holdings  and  rights  ad  libitum  has  always 
been  recognized  as  a  fundamental  principle. 

Second.  In  a  partnership  each  partner  is  the  agent  of 
each  other  and  of  the  firm  in  respect  to  the  partnership 
business,  while  in  a  corporation  the  only  agents  Avho 
can  bind  the  corporation  are  those  who  are  appointed  by 
the  directors,  who  in  turn  are  so  empowered  by  the 
shareholders. 

Third.  Partners  are  "  severally  and  individually " 
liable  for  all  the  debts  of  the  firm,  while  the  sharehold- 
ers have  no  liability  for  the  debts  of  the  corporation, 
save  the  liability  of  paying  in  full  for  the  shares  of 
stock  for  which  they  subscribe. 

This  last  rule  has  been  qualified  by  two  institutions 
of  modern  times,  one  of  w^hich  is  rather  uncommon, 
while  the  other  is  becoming  a  familiar  and  favorable  in- 
stitution. The  first  is  known  as  the  "  full  liability  cor- 
poration," provision  for  which  is  made  by  the  statutes 
of  several  States.^*^  Under  this  statute  shareholders  may 
become  liable  as  general  partners,  but  it  is  necessary  to 
incorporate  the  desire  in  the  charter  or  articles,  other- 
wise it  will  not  be  recognized.  The  second  institution 
is  the  "  limited  partnership."  Under  statutes  now  exist- 
ing it  is  possible  for  a  partnership  to  be  formed  where 
one  or  more  of  the  members  become  general  partners, 
with  full  and  general  liability,  while  the  others  have 
no  liability  beyond  the  amount  of  money  contributed  by 
them  to  the  partnership  assets.-*^ 

§  5.  The  corporation  vs.  joint-stock  companies. —  Xo 
distinction  here  exists  save  the  one  great  distinction  of 
liability.  A  joint-stock  company  is  a  corporation  for 
all  practical  purposes,  possessing  the  usual  powers  and 
faculties  of  a  corporation,  except  that  the  shareholders 

10.  See  Laws  of  N.  Y.  1892,  chap.  691,  §  2. 

11.  See  Laws  of  N.  Y.  1897,  chap.  420. 


10  bUMMAKY    OF    LAW    OF    PKIVATE    COE^OKATIO^'S. 

are  severally  and  individually  liable  as  partners  for  the 
debts  of  the  concern.  Save  for  this  peculiar  and  radi- 
cal distinction  the  rules  affecting  corporations  are  gen- 
erally applicable  to  joint-stock  companies. 

''  The  words  '  joint-stock  company '  have  never  been 
used  as  descriptive  of  a  corporation  created  by  special 
act  of  the  legislature,  and  authorized  to  issue  certificates 
of  stock  to  its  shareholders.  They  describe  a  partner- 
ship made  up  of  many  persons  under  articles  of  asso- 
ciation, for  the  purpose  of  caiTying  on  a  particular  busi- 
ness, and  having  a  capital  stock  divided  into  shares 
transferable  at  the  pleasure  of  the  holder." 

"  The  distinction  between  a  corporation  and  an  un- 
incorporated joint-stock  association  is  that  the  creation 
of  the  corporation  merges  into  the  artificial  body  and 
drowns  in  it  the  individual  rights  and  liabilities  of  the 
members,  while  the  organization  of  a  joint-stock  com- 
pany leaves  the  individual  rights  and  liabilities  unim- 
paired and  in  full  force.  A  joint-stock  company  is  a 
partnership  Avith  some  of  the  powers  of  a  corporation."  ^^ 
§  6.  The  corporation  vs.  the  shareholder. —  In  stating 
that  a  corporation  is  considered  as  an  entity,  it  has  been 
taken  for  granted  that  it  is  so  considered  without  regard 
to  the  members  or  shareholders  who  compose  it.  This 
is  true  at  law  as  well  as  in  the  ordinary  transactions  of 
business,  and  has  been  so  regarded  from  the  earliest 
times.  This  is  true  as  to  a  partnership  from  the  stand- 
point of  ordinary  business,  but  the  courts  of  law  have 
not  as  yet  recognized  it.  The  corporation  has  been  per- 
sonified, however,  and  regarded  as  a  united  body,  the 
individuals  composing  it  being  regarded  as  component 
parts  merely.  "  In  most  cases  this  is  just  as  well  as  a 
convenient  means  of  working  out  the  rights  of  the  real 
persons  interested.  However,  it  is  essential  to  a  clear 
understanding  of  many  important  branches  of  the  law 

12.  Finch,  J.,  in  People  v.  Coleman,  133  N.  Y.  274. 


INTEODUCTIOiS".  11 

-of  corporations  to  bear  in  mind  distinctly  that  the  exist- 
ence of  a  corporation  independently  of  its  shareholders 
is  a  fiction,  and  that  the  rights  and  duties  of  an  incorpo- 
rated association  are  in  reality  the  rights  and  duties  of 
the  persons  who  compose  it,  and  not  of  an  imaginary 
being."  ^^ 

This  distinction  is  usually  recognized  by  answering 
the  questions  :  Who  contracts  ?  AVhere  is  the  title  to  the 
property?  Who  owns  the  capital  stock?  ^Yho  sues  or 
is  sued  ?  These  questions  are  answered  by  the  following 
several  excerpts  from  leading  cases : 

"  The  estate  and  rights  of  a  corporation  belong  so 
completely  to  the  body  that  none  of  the  individuals  who 
compose  it  have  any  right  of  o^^^lership  in  them,  nor 
can  dispose  of  any  part  of  them."  ^^  A  shareholder 
owns  no  specific  part  of  a  thing.  He  has  a  share,  but 
the  title  is  owned  by  the  corporation. 

'■'■  The  money  and  property  of  a  corporation  belong 
to  it  and  not  to  the  individual  members."  ^^  ''A  corpora- 
tion is  a  distinct  entity,  to  be  considered  apart  and  sepa- 
rate from  the  individuals  who  compose  it,  and  is  not 
affected  by  the  personal  rights  and  obligations  and  trans- 
actions of  its  stockholders,  and  this  whether  said  rights 
accrued  or  obligations  were  incurred  before  or  subse- 
quent to  incorporation."  ^^ 

"A  corporation  and  its  shareholders  are  distinct  legal 
entities.  They  are  not  responsible  for  the  debts  or  the 
torts  of  the  corporation.  They  cannot  be  parties  in 
actions  respecting  corporate  rights  nor  have  they  any 
title  or  direct  interest  in  the  property."  ^"^  So,  even  if 
one  man  own  all  the  shares  of  the  corporation,  the  deed 

13.  Morawetz,  chap.  1,  §   1. 

14.  Williamson  v.  Smoot.  7  Mart^,  (La.)    31. 

15.  Tomlinson  v.  Bricklayers'  Union,  87  Ind.  308. 

16.  Moore  &  Handley  Co.  v.  Towers  Co.,  87  Ala.  206;  First 
Nat.  Bank  v.  Wood,  86  "Hun,  491. 

17.  Keith  v.  Clark,  4  Lea   (Tenn.),  718. 


12  SUMMARY    OF    LAW    OF    PKIVATE    CORPORATIONS. 

to  the  property  must  pass  in  the  name  of  the  corpora- 
tion.^^ 

"  Shareholders  are  not  joint-tenants,  or  in  any  other 
sense  co-owners  of  the  corporate  property  either  before 
or  after  dissolution.  The  title  rests  in  the  legal  entity 
called  the  corporation.  A  share  of  the  capital  stock 
merely  gives  the  right  to  partake,  according  to  the 
amount  put  into  the  fund,  of  the  surplus  profits  of  the 
corporation,  and  ultimately,  on  the  dissolution  of  it,  of 
so  much  of  the  fund  thus  created  as  remains  unimpaired 
and  is  not  liable  for  the  debts  of  the  corporation."  ^" 

"  It  may  be  necessary  at  times  to  regard  the  indi- 
vidual shareholders  as  the  real  parties  in  interest,  owing 
to  the  rights  of  creditors,  and  the  obligations  existing 
between  a  corporation  and  its  shareholders  by  reason  of 
their  contract  of  membership ;  but  justice  demands,  as 
a  rule,  that  a  corporation  be  treated  as  a  collective 
entity,  without  regard  to  its  individual  shareholders."  ^^ 

It  has  often  been  stated  that  a  corporation  is  to  be 
compared  to  a  trustee  or  cestui  que  trust.  A  corpora- 
tion docs  not  hold  its  property  for  its  shareholders,  but 
for  its  business,  and  within  the  limits  of  its  powers  has 
absolute  disposal  of  it  without  regard  to  the  shareholder. 
All  that  the  shareholder  can  do  is  to  keep  the  property 
or  capital  from  being  used  otherwise  than  for  the  spe- 
cific purposes. 

18.  Humphrey  v.  McKissick,  140  U.  S.  304. 

19.  Tlionipson  on  Corporations,  §  1071. 

20.  Gallagher  v.  Brewing  Co.,  53  Minn.  214. 


CHAPTER  II. 

(a)  The  Ckeatio:n"  of  a  Corporation. 

(b)  The  Citizenship  of  a  Corporation. 

(c)  Corporations  de  Jure. 

(d)  Corporations  de    Facto. 

(a)   The  Creation  of  a  Corporation. 

§  7.  General —  The  very  essence  of  a  corporation  is 
that  it  should  have  incorporation  under  the  authority  of 
the  laAV.  Lord  Coke,  in  the  Sutton  Hospital  Case/  said 
this  might  be  by  four  means :  By  common  law,  as  the 
king  himself ;  by  authority  of  Parliament ;  by  the 
king's  charter,  and  by  prescription.  The  right  of  the 
king  to  create  corporations  rests  upon  prescription.^ 
For  many  years  in  England  corporations  were  created 
either  by  the  Crown,  or  had  existed  and  done  business  so 
long  as  corporations  that  the  mind  of  man  ran  not  to  the 
contrary.  The  latter  corporations  were  declared  cor- 
porations existing  by  prescription.  In  later  years,  the 
power  of  the  Crown  to  grant  charters  has  been  greatly 
abridged,  and  trading  corporations  in  England  are 
created  either  by  a  special  or  general  act  of  Parliament. 
Whenever  legislative  power  was  invoked,  it  was  done 
through  a  special  act,  and  upon  the  introduction  gen- 
erally of  trading  corporations  this  was  the  method  of 
creation.  From  these  methods  sprang  the  idea  of  special 
sanction,  which  was  originally  one  of  the  distinctions 
existing  between  a  corporation  and  a  partnership.  To 
this  special  sanction  we  also  owe  the  idea  that  to  create 
a  corporation  is  to  create  a  law,  and  this  can  be  done 

1.  10  Coke's  Reports,  28. 

2.  1  Kyd,  44. 

[13] 


1-1  SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

only  by  the  law-making  body.  In  the  United  States 
this  rule  has  been  applied  from  the  very  inception,  and 
obtains  to-day  in  all  of  its  rigor,  save  that  special  acts 
have  been  generally  done  away  with  by  constitutional 
amendments,  and  the  usual  method  is  to  create  by  means 
of  general  laws. 

§  8.  Corporations  in  the  United  States —  Under  the 
United  States  Constitution  no  direct  or  express  au- 
thority is  found  for  the  creation  of  corporations 
by  Congress.  But  Congress  may  create  corpora- 
tions as  an  incident  to  powers  expressly  granted  to 
it.  Given  a  constitutional  object  upon  which  Con- 
gress may  lawfully  act,  and  the  means  by  which  it  is 
done  are  not  inquired  into.  "  Whether  or  not  Congress 
can  create  a  corporation  depends  upon  the  constitu- 
tionality of  the  object  to  be  attained.  If  a  corporation 
is  a  means  of  attaining  that  object,  the  courts  cannot 
inquire  into  it."  ^ 

In  this  way  many  corporations  have  been  created  by 
Congress,  but  always  for  the  purpose  of  promoting  some 
public  object.  National  banks  are  the  most  common  of 
the  United  States  corporations,  but  some  few  railroads, 
post-road  companies,  dredging  companies,  and  construc- 
tion companies  exist  by  virtue  of  United  States  charters. 

§  9.  Creation  by  State  legislature. —  The  trading, 
stock,  or  business  corporation  generally  is  under 
control  of  the  various  States,  and  these  have  been 
and  are  created  by  the  legislature.  The  right  of 
the  legislature  to  create  is  a  definite  right  arising  from 
the  Constitution  of  the  State,  which  Constitution  defines 
the  powers  of  the  various  branches  of  government.  It 
may  be  taken  away  by  the  Constitution,  but  unless  so 
taken  away  belongs  to  the  legislature,  and  is  incidental 
to  the  general  law-making  power  of  the  State.^     It  is 

3.  AloCuUagh  v.  Maryland,  4  Wheat.  316. 

4.  Franklin  Bridge  Co.  v.  Wood,  14  Ga.  80;  Bank  of  Chenango 
V.  Brown,  26  N.  Y.  467. 


CKEATIOX    OF    A    CORPORATION.  15 

evident  that  given  general  authority  to  create  corpora- 
tions, no  restrictions  are  placed  upon  the  legislature, 
and  a  special  act  or  law  applying  to  the  particular  cor- 
poration created  was  the  original  method  of  creation. 
This  special  act  governed  the  creation,  formation, 
and  conduct  of  the  cori^oration  created,  as  well  as  the 
relationship  existing  between  the  corporation  and  the 
States,  except  that  it  could  not  contravene  or  nullify 
general  laws  already  existing  and  applicable  to  corpora- 
tions generally. 

These  special  acts  often  gave  particular  corporations 
rights  and  immunities  not  possessed  by  others,  and  the 
abuse  of  this  legislative  authority  has  led,  generally,  to 
constitutional  restrictions  upon  the  legislatures.  In  a 
majority  of  the  States  of  the  Union  to-day  the  legis- 
latures are  prohibited  from  granting  charters  except  in 
accordance  with  certain  prescribed  rules,  and  these  rules 
generally  prohibit  the  legislature  from  creating  by  spe- 
cial act,  and  provide  for  general  laws  applicable  to 
the  creation  of  all  corporations. 

This  may  not  prevent  special  acts  for  certain  corpora- 
tions, however,  unless  the  Constitution  is  express  upon 
the  subject.  In  ISTew  York  general  corporation  laws 
are  in  force,  but  the  legislature  has  discretionary  power 
to  create  certain  classes  of  corporations  by  special  act.^ 

A  law  may  be  general  and  yet  confined  to  a  particular 
and  limited  class  of  corporations ;  as  for  instance,  a  gen- 
eral law  governing  elevated  railroads  in  ISTew  York 
would  apply  to  only  two  companies  in  the  State,  though 
the  same  law  would  be  applicable  if  more  were  created 
in  other  portions  of  the  State  than  l^ew  York  city. 

§  10.  Delegation  of  powers  to  create. —  In  England, 
Parliament,  bound  by  no  written  constitution,  may  con- 
fer the  power  to  grant  corporate  charters  upon  any  per- 
son, but  this  is  not  so  in  the  United  States.     A  general 

5.  People  V.  Bowen,  21  N.  Y.  517. 


IG  SUMMARY    OF    LAW    OK    TKIVATE    COKPOKATIONS. 

power  to  confer  corporate  charters  cannot  be  delegated 
by  the  Icgishitiire  to  any  other  agency,^  the  reason  being 
that  that  authority  to  create  must  remain  where  located 
by  the  Constitution.  But  the  legislature  having  en- 
acted that  corporations  may  be  created  by  complying 
with  certain  conditions,  the  duty  of  ascertaining  whether 
the  conditions  have  been  complied  with  is  a  ministerial 
one  and  may  be  performed  by  any  agency  appointed  by 
the  legislature.  In  some  cases  this  agency  is  a  court, 
in  others  the  secretary  of  state  or  other  officer  of  the 
State.  It  is  to  be  noted  that  the  officer  or  court  thus 
directed  may  not  use  his  judgment  to  refuse  applica- 
tions when  the  statutes  have  been  complied  with.  The 
duty  is  both  mandatory  and  directory,'^  for  when  the 
statutes  come  from  the  legislature,  they  are  complete  as 
laws,  and  do  not  depend  for  their  force  and  efficiency 
upon  the  action  or  Avill  of  any  other  person. 

§  11.  Creation  under  general  laws. —  Incorporation  un- 
der general  statutes  must  conform  to  the  several  require- 
ments of  the  statutes,  which  are  really  in  the  nature  of 
conditions  precedent  to  incorporation.  A  certificate 
which  fails  to  comply  with  the  essentials  required  will 
not  be  effective  to  bring  the  corporation  into  existence, 
nor  will  it  be  proof  of  its  corporate  existence.®  This 
compliance  with  the  statute  need  not  be  a  literal  one. 
If  a  substantial  compliance,  it  is  enough.^ 

Acceptance  of  Charter. 

§  12.  A  charter  cannot  be  forced  upon  any  body  of 
persons  who  do  not  choose  to  accept  it.^*^  The  creation, 
of  a  corporation,  though  it  come  from  the  legislature,  is 

6.  Franklin  Bridge  Co.  v.  Wood,  14  Ga.  80. 

7.  Idf>m. 

8.  People  V.  Selfridge,  52  Cal.  331;  Fifth  Baptist  Church  v. 
Baltimore,  etc..  li.  Co..  4  Mackey   (D.  C),  43. 

9.  Thompson  v.  People,  23  Wend.  537 ;  Bigelow  v.  Gregory, 
73  111.  107. 

10.  Grant,  p.  12. 


ACCEPTANCE    OF    CHARTER.  17 

no  corporation  until  the  corporators  ask  for  its  creation 
or  accept  it  when  given,  by  doing  acts  to  get  it  or  acting 
in  a  manner  to  be  judged  as  a  corporation.  An  accept- 
ance must  be  shown  either  expressly  or  impliedly.^^  It 
cannot  be  accepted  in  part,  for  if  this  were  so  the  cor- 
porators might  accept  benefits  and  reject  obligations, 
thus  being  the  creators  themselves. ^^ 

Acceptance  of  a  charter,  to  be  binding,  must  be  by 
the  corporators  in  their  constituent  capacity.  This 
is  usually  done  at  the  first  meeting  of  the  stockholders 
after  the  charter  has  been  received.  It  may  be  done 
impliedly  by  acting  under  the  charter  and  pushing  the 
corporation  as  a  "  going  concern."  When  once  accepted 
the  corporation  is  then  bound  by  all  the  laws  in  the 
general  statutes  and  charter  which  may  affect  that  class 
of  corporations. 

Citizenship. 

§  13.  The  corporation  as  a  citizen —  "  A  corporation 
must  be  named  of  some  place  as  will  distinguish 
its  situation  from  that  of  others."  ^^  This  was  the 
ancient  law  in  England,  but  it  has  been  very  gen- 
erally lost  sight  of,  save  perhaps,  in  the  case  of 
certain  membership  corporations.^*  Being  an  arti- 
ficial person,  a  corporation  has  not  the  status  of  a 
natural  person,  and  is  naturally  a  citizen  only  of  the 
State  or  place  which  created  it.  Time  and  again  it  has 
been  held  that  a  corporation  is  not  a  citizen  within  the 
Fourteenth  Amendment  of  the  United  States  Constitu- 
tion, which  allows  citizens  of  one  State  the  same  priv- 
ileges and  immunities  as  are  enjoyed  by  citizens  of  other 
States  against  legislation  by  the  State  into  which  the 

11.  Aspinwall  v.  Davies,  22  How.  364;  Ellis  v.  Marshall,  2 
Mass.  269;  State  v.  Dawson,  16  Ind.  40. 

12.  Rex  V.  Westwood,  4  Barn.  &  Cress.  781. 

13.  Bacon's  Abr.,  title  Corporations,  2. 

14.  Grant,  p.  54. 

2 


18         SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

corporation  goes  or  transacts  business. ^'^  But  a  corpora- 
tion is  a  citizen  to  the  extent  that  it  cannot  be  deprived 
of  the  equal  protection  of  the  laws.^*^ 

§  14.  Corporate  residence —  The  residence  of  corpo- 
ration is  within  the  place  or  State  of  its  creation.  It 
has  no  legal  Cuxistence  outside  of  that  State.  It  exists 
only  in  contemplation  of  law  and  by  force  of  law,  and 
where  the  law  ceases  to  operate  it  can  have  no  existence 
—  it  must  dwell  in  the  place  of  its  creation. ^^ 

"  The  residence  of  a  corporation,  if  it  can  be  said  to 
have  a  residence,  is  necessarily  where  it  exercises  its 
corporate  functions.  It  dwells  in  the  place  where  its 
business  is  done.  It  is  located  where  its  franchises  are 
exercised."  ^^  To  properly  understand  this  last  state- 
ment, it  becomes  necessary  to  understand  what  is  meant 
by  "  corporate  functions."  That  a  corporation  may  do 
business  in  another  State  than  that  which  created  it  is 
self-evident,  unless  restricted  by  its  charter  or  the  law. 
It  is  evident  that  by  "  corporate  functions  "  is  meant 
those  corporate  acts  M'hich  are  necessary  to  the  organiza- 
tion, the  existence  of  and  the  final  dissolution  of  the 
corporation.  These,  unless  express  permission  be  other- 
wise given,  must  be  performed  within  the  State.^''  This 
would  include  the  acceptance  of  the  charter,  the  election 
of  directors,  resolutions  as  to  mortgaging  the  property, 
increasing  or  decreasing  the  capital  stock,  applying  for 
larger  powers,  and  proceedings  for  dissolution.  All 
must  be  done  at  meetings  of  the  stockholders  held  within 
the  State  of  its  creation. 

A  further  distinction  must  here  be  made  between  cor- 
porate acts  and  the  acts  of  the  agents  of  the  corporation. 
"  It  seems  well  settled  by  the  weight  of  authority  that 

15.  Orient  Co.  v.  Daggs.  172  U.  S.  557. 

16.  Railway  Co.  v.  Gibbs,  142  U.  S.  386;  Railway  Co.  v. 
Mackav,  127  U.  S.  205. 

17.  Bank  of  Augusta  v.  Earle,  13  Pet.   (38  U.  S.)   519. 

18.  Bristol  V.  Chicago,  etc.,  Ry.  Co.,  15  111.  436. 

19.  Miller  v.  Ewer,  27  Me.  509';  Freeman  v.  Machias,  etc.,  Co., 
38  id.  343;  Smith  v.  Silver  Mining  Co.,  64  Md.  85. 


CITIZENSHIP,  19 

directors  may  hold  meetings,  have  an  office,  make  con- 
tracts, and  transact  a  part,  at  least,  of  the  general  busi- 
ness of  the  corporation  in  another  State,  unless  pro- 
hibited by  local  legislation.  But  the  directors  when  so 
acting  are  not  the  corporate  body,  but  its  mere  agents. 
]^or  do  we  think  it  makes  any  difference  as  to  the  opera- 
tion of  this  rule,  that  the  named  corporators,  as  in  this 
case,  are  empowered  by  the  charter  to  manage  the  affairs 
of  the  corporation,  and  to  exercise  all  such  rights  as  the 
charter  grants,  "  as  directors/'  until  others  are  elected. 
The  two  capacities  of  corporators  and  directors  are  dis- 
tinct, and  they  cannot  do  in  the  latter  those  acts  which 
the  law  requires  them  to  do  in  the  former  capacity."  ^^ 

Statute  or  the  charter  itself  may  allow  some  of  these 
"  corporate  functions  "  to  be  performed  outside  of  the 
State,  but  imless  express  permission  be  so  given,  such 
acts  are  held  to  be  void.^^ 

Some  difficulty  may  arise  under  the  consolidation 
statutes.  For  instance,  a  separate  corporation  may  be 
formed  for  the  same  purpose,  say  a  railroad  company, 
in  each  of  several  States.  By  the  consolidation  statutes 
these  several  companies  may  consolidate  under  one  man- 
agement, and  one  common  capital  stock,  with  the  same 
individuals  as  owners,  and  to  all  appearances  the  com- 
pany be  one  entire  and  complete  corporation.  Suppose 
they  take  the  name  of  one  of  the  companies,  which  was 
organized  under  the  laws  of  one  of  the  several  States. 
Does  this  make  the  combined  company  a  corporation  of 
this  particular  State,  or  is  it  a  corporation  of  each  of  the 
States  ?  The  weight  of  authority  holds  that  a  corpora- 
tion may  not  have  two  domiciles  and  cannot  be  the  same 
legal  being  in  two  States,  even  though  it  be  spoken  of  in 
the  laws  of  the  two  States  as  one  corporate  body.  It  is  a 
distinct  corporation  in  each  State.^^ 

20.  Smith  v.  Silver,  etc.,  Co.,  64  Md.  85. 

21.  Idem. 

22.  Ohio,  etc.,  Ry.  Co.  v.  Wheeler,  1  Black.  (66  U.  S.)  286; 
People  V.  New  York,  etc.,  Ry.  Co.,  129  N.  Y.  474. 


20  SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

§  15.  Citizenship  in  the  United  States  courts. —  From 
the  United  States  jurisdictional  standpoint  a  cor- 
poration is  regarded  as  a  citizen  of  the  State  in  which 
it  was  created.  So,  too,  the  shareholders  are  regarded  as 
citizens  of  the  State  in  which  the  corporation  was 
created,  irrespective  of  their  actual  residence  or  citizen- 
ship. Further,  the  corporation  is  regarded  as  a  citizen 
of  that  Federal  district  in  which  its  principal  office  is 
located,  and  actions  between  a  citizen  and  a  corporation, 
the  one  a  resident  and  the  other  having  its  principal 
office  in  the  same  district,  will  not  lie  unless  the  district 
embrace  two  or  more  States,  and  the  citizen  and  cor- 
poration be  citizens  of  the  different  States.^^  The  juris- 
diction of  the  Federal  courts  is  defined  by  the  Constitu- 
tion, and  where  actions  arise  between  citizens,  thej  must 
be  residents  of  different  States  to  avail  themselves  of 
these  courts.  To  such  an  extent  a  corporation  is  a  citi- 
zen, and,  as  has  been  said  above,  is  entitled  to  the  equal 
protection  of  the  laws. 

Corporations  de  Jure. 

§  16.  By  this  temi  is  meant  corporations  that  are 
created  by  law,  and  in  full  and  complete  compliance 
with  all  of  the  provisions  of  the  law.  It  has  already 
been  observed  that  when  cor|iorations  are  created  either 
by  special  act  or  under  general  laws,  the  rules  prescribed 
in  the  laws  must  be  substantially  complied  with,  other- 
wise there  will  be  a  defect  in  the  organization  which  may 
prove  disastrous  in  the  end.  For  this  purpose  the  rules 
or  conditions  prescribed  in  the  laws  may  be  divided  into 
conditions  precedent,  i.  e.,  those  rules  which  must  be 
complied  Avith  to  lawfully  and  completely  incorporate, 
and  conditions  subsequent,  or  rules  or  conditions  which 

23.  Shaw  V.  Quiney  Mining  Co.,  145  U.  S.  444;  Galveston,  etc., 
Ey.  Co.  V.  Gonzales,  151  id.  496. 


COKPOBATIONS  DE  JUKE.  21 

should  be  fulfilled  after  incorporation  in  order  to  com- 
plete. These  conditions  subsequent  are  divisible  into 
conditions  mandatory  and  conditions  directory.  By  way 
of  illustration,  let  us  suppose  the  following :  By  a  spe- 
cial act  a  railroad  company  is  created  under  the  follow- 
ing rules  or  conditions.  (1)  Articles  of  incorporation 
must  be  filed  within  one  month  from  passage  of  act,  and 
shall  contain  the  names  of  all  directors  for  the  first  year, 
and  further  show  that  ten  per  cent,  of  the  capital  stock 
subscribed  for  has  been  paid  in  to  the  company.  (2) 
The  company  shall  pay  to  the  State  treasurer  one-eighth 
of  one  per  cent,  as  incorporation  tax  upon  the  submis- 
sion of  the  articles  of  incorporation.  (3)  The  articles 
must  be  subscribed  by  five  or  more  persons,  and  acknowl- 
edged by  each.  (4)  The  call  for  the  first  meeting  of 
the  stockholders  must  be  made  by  a  majority  of  the  sub- 
scribers of  the  articles.  (5)  The  company  is  to  com- 
mence operations  within  one  year,  and  to  have  the  road 
completed  within  five  years. 

Here  1,  2,  and  3  are  conditions  precedent,  and  no  in- 
corporation can  take  place  save  by  a  substantial  com- 
pliance with  these  conditions.  It  will  be  noted  that 
upon  the  compliance  with  these  conditions  a  charter  is 
actually  issued  to  the  incorporators,  and  it  is  in  their 
hands.  The  remainder  of  the  acts  must  be  done,  but 
are  subsequent  to  the  receipt  of  the  charter,  which  has 
already  declared  them  to  be  a  corporation.  Four  and 
five  are  then  conditions  subsequent.  Four  is  a  condition 
subsequent  and  directory,  designed  to  secure  to  the  mem- 
bers the  rights  conferred  by  law.  If  they  waive  that 
right,  and  attend  a  meeting  called  by  one  subscriber,  no 
harm  is  done,  and  no  serious  result  will  follow.  Five  is 
a  condition  subsequent  and  mandatory  from  the  stand- 
point of  the  State.  No  creditor  or  third  party  could 
take  advantage  of  it,  but  the  State  may  say,  "  You  have 
not  fulfilled  the  conditions  prescribed,"  and  annul  the 


22         SUMMAKY    OF    LAW    OF    PRIVATE    CORPOKATIONS. 

charter.  So  far  as  the  public  is  concerned,  acceptance  of 
a  present  grant,  though  it  be  subject  to  conditions  sub- 
sequent, will  be  enough.^ 

*'  There  is  a  broad  and  obvious  distinction  between 
such  acts  as  are  declared  to  be  necessary  steps  in  the 
process  of  incorporation,  and  such  as  are  required  of 
the  individuals  seeking  to  become  incorporated,  but 
which  are  not  made  prerequisite  to  the  assumption  of 
corporate  powers.  In  respect  to  the  former,  any  mate- 
rial omission  will  be  fatal  to  the  existence  of  the  cor- 
poration, and  may  be  taken  advantage  of,  collaterally,  in 
any  form  in  which  the  fact  of  incorporation  can  properly 
be  called  into  question.  In  respect  to  the  latter,  the  cor- 
poration is  responsible  only  to  the  government,  and  in  a 
direct  proceeding  to  forfeit  its  charter."  ^^ 

Corporations  de  Facto. 

§  17.  Defined. —  A  corporation  de  jure  is  one  which 
is  invulnerable  if  assailed  by  the  State.^^  From 
this  it  follows  that  there  is  a  class  of  coroprations 
vulnerable  if  assailed  by  the  State,  and  this  class 
is  called  by  the  name.  Corporations  de  Facto.  It 
is  easily  possible  to  conceive  a  group  of  incorpo- 
rators who  organize  themselves  as  a  corporation, 
transact  business,  and  hold  themselves  out  to  the 
world  as  a  corporation.  If  this  have  been  done  under 
color  of  law,  i.  e.,  an  apparent  attempt  to  perfect  a  cor- 
poration under  the  law,  coupled  with  an  intention  to  so 
incorporate,  and  the  transaction  of  business  as  a  corpora- 
tion, the  failure  to  fulfill  some  substantial  requirement 
will  prevent  it  from  being  a  corporation  de  jure,  but  it 

24.  See  People  v.  Water  Co.,  97  Cal.  276;  People  v.  Selfridore, 
52  ifl.  331;  Newcomb  v.  Reed,  12  Allen,  362;  Guckert  v.  Hacke, 
150  Pa.  St..  303. 

25.  MokehiTTine  Hill,  etc.,  Co.  v.  Woodbury,  14  Cal.  424.  See 
also  Oranhv  ]\fininfr  Co.  v.  Richards,  95  Mo.  111. 

26.  See  24  L.  R.  A.  259. 


I 


J 


COEPOEATIONS  DE  FACTO.       .  23 

will  be  declared  a  corporation  in  fact  or  de  facto.  The 
reason  behind  this  is  the  general  one  of  public  policy. 
An  extreme  illustration  might  be  a  railroad  company 
associating  under  a  special  act  which  required  accept- 
ance within  a  specified  or  limited  time.  The  acceptance 
was  not  made  until  some  time  after  the  time  specified, 
where  the  privilege  had  been  revoked  by  constitutional 
authority.  Ignorant,  perhaps,  of  this,  the  incorporators 
went  ahead,  issued  stock  and  bonds,  bought  and  graded 
the  roadbed,  bought  rolling  stock,  and  proceeded  to 
carry  on  the  road  in  good  faith.  It  could  not  be  a  cor- 
poration de  jure,  for  the  omission  was  fatal,  but  public 
policy  forced  the  idea  that  it  was  a  corporation  in  fact, 
and  as  such  might  continue  doing  business,  until  assailed 
by  the  party  whose  laws  had  been  disregarded,  viz.,  the 
State.^^  To  declare  otherwise  would  mean  severe  hard- 
ship and  loss  to  the  community,  to  the  shareholders,  to 
the  contractors,  to  the  creditors  and  to  the  public,  for 
it  would  be  absurd  on  the  part  of  the  State  to  attempt  to 
compel  the  placing  of  all  parties  in  their  original  statu 
quo. 

So  a  corporation  de  facto  is  one,  the  formation  of 
which  was  irregular,  i.  e.,  not  in  compliance  with  condi- 
tions precedent  and  mandatory.  To  make  a  corpora- 
tion de  facto,  three  elements  must  be  shown:  (1) 
a  law  under  which  the  cor^Doration  might  have  been 
organized  as  a  corporation  de  jure,  if  all  conditions 
prescribed  had  been  complied  with;  (2)  an  intention 
on  the  part  of  the  incorporators  to  not  only  create 
a  corporation,  but  to  comply  with  the  law;  and  (3)  user 
on  the  part  of  the  corporation,  i  e.,  the  transaction  of 
business  and  the  holding  ^^  of  themselves  out  to  the 
world  as  a  corporation. 

27.  State  v.  Dawson,  16  Ind.  40. 

28.  Church  v.  Pickett,  19  N.  Y.  482;  Taylor  on  Corporations, 
p.  145 :  Finnegan  v.  Naerenberg,  52  Minn.  239 ;  Marsh  v.  Mathias, 
19  Utah,  350  TEe  Gibbs'  Estate,  157  Pa.  St.  59. 


2-i  SUMM^VKY    OF    LAW    OF    TKIVATE    C0RP0RAT10^■S. 

The  cases  most  frequently  cited  on  this  subject  are 
those  where  some  third  part;^  —  creditors  —  have  dealt 
with  the  corporation  as  such,  and,  finding  some  irregu- 
larity in  the  incorporation,  have  sought  to  hold  the  in- 
dividual members  as  partners.  But  this  has  been  met 
by  the  answer  that  the  State  is  the  only  party  whose 
laws  have  been  violated,  and  is  therefore  the  only 
party  who  can  inquire  into  the  matter. 

§  18.  Who  may  raise  the  question  and  when —  The 
State  may,  if  it  sees  fit,  waive  a  strict  compliance  with 
the  terms  of  the  statute  or  charter,  and  may  elect 
whether  it  will  insist  upon  a  forfeiture,  if  there  has 
been  a  breach  of  condition.^^  It  it  does  not  elect  to 
forfeit,  no  party,  creditor  or  otherwise,  having  dealt 
with  the  corporation  as  such,  will  be  allowed  to  question 
the  validity  of  the  corporation. 

This  position  is  based  on  the  principle  of  estoppel, 
that  when  one  has  done  an  act,  or  made  a  statement, 
Avhich  it  would  be  a  fraud  on  his  part  to  controvert  or 
impair,  and  such  act  or  statement  has  so  influenced  any 
one  that  it  has  been  acted  upon,  the  party  making  it 
will  be  cut  off  from  the  power  of  retraction.^^ 

The  courts  therefore  are  bound  to  regard  a  com- 
pany incorporated  according  to  all  the  required  forms 
of  law  as  a  corporation  so  far  as  third  persons  are  con- 
cerned until  it  is  dissolved  by  a  judicial  proceeding  in 
behalf  of  the  government  that  created  it;  and  until 
its  franchises  have  been  adjudged  in  proceedings  at  the 
instance  of  the  State  not  to  exist,  it  is  a  coi*poration 
de  facto  at  least.^^  So  contracts  of  a  de  facto  corpora- 
tion, and  the  acts  generally  of  the  corporation  acting 
itself  or  through  its  officers  or  agents,  may  be  enforced 

29.  Briggs  v.  Cape  Cod  Co.,  137  Mass.  71,  and  cases  cited 
therein. 

30.  Richardson  v.  Baldwin,  1  Zabr.  (X.  J.)  397. 

31.  Laflin  v.  Powder  Co..  4G  Md.  315;  Frost  v.  Coal  Co.,  24 
How.   (65  U.  S.)   278;  Cochran  v.  Arnold,  58  Pa.  St,  399. 


COKPOEATIONS  DE   FACTO.  25 

by  and  against  the  corporation  the  same  as  if  it  were 
a  corporation  de  jure.^^ 

Of  course,  it  follows  that  if  a  third  party  cannot 
question  the  validity  of  a  corporation  with  which  he 
has  contracted,  much  less  can  a  shareholder  question 
the  regularity  of  it.  And  this  not  only  on  the  ground 
of  estoppel,  but  also  because  it  would  be  a  fraud  upon 
his  associates. 

In  States  where  corporations  are  created  by  special 
act,  and  in  States  where  the  Constitution  does  not 
absolutely  and  expressly  prohibit  the  creation  by  special 
act,  there  is  nothing  to  prevent  the  legislature  from 
passing  an  act  validating  the  corporate  acts  and  declar- 
ing the  coi-poration  to  be  de  jure.  This  has  been  done 
many  times.^^  But  if  the  State  be  expressly  pro- 
hibited such  an  act  would,  it  seems,  amount  to  the 
creation  of  a  corporation  by  a  special  act,  and  there- 
fore unconstitutional.^*  Several  comparatively  recent 
decisions  have  met  a  peculiar  situation  heretofore  ex- 
isting. In  Michigan  a  number  of  baniking  associations 
were  formed  under  a  law  which  was  afterward  de- 
clared unconstitutional.  In  actions  against  the  banks 
it  was  held  that  they  were  neither  de  facto  corporations, 
nor  could  the  members  be  sued  as  partners.^^  Tbey 
were  not  de  facto,  because  it  was  held  that  there  must 
be  an  attempt  to  organize  under  a  valid  law.  The  re- 
sult was  that  the  members  of  these  associations  escaped 
liability  in  all  directions,  though  the  decisions  have 
been  justly  criticised.^^ 

32.  Doty  V.  Patterson.  155  Ind.  60.  and  cases  therein  cited. 

33.  Shaw  V.  Norfolk  Ry.,  etc.,  Co..  5  Gray  (Mass.).  162:  Black 
River,  etc.,  Rv.  Co.  v.  Barnard.  31  Barb.  (K  Y.)  258;  Koch  v. 
North  Ave.  Ry.  Co.,  75  Md.  222. 

34.  Oroville,  etc.,  Ry.  Co.  v.  Supervisors.  37  Cal.  354;  Potts  v. 
Delaware,  etc.,  Co..  9  IST.  J.  Eq.  592.  But  see  Koch  v.  North  Ave. 
Ry.  Co..  75  Md.  222,  supra. 

35.  Greene  v.  Graves.  1  Doug.  351 ;  Hnrlburt  v.  Britain,  2  id. 
191 ;   State  v.  Howard,  1  Mich.  512. 

36.  1  Thompson,  §  506, 


26         SUMMARY    OF    LAW    OF    PRIVATE    COEPOEATIONS. 

The  -weight  of  authority  is  in  favor  of  the  state- 
ment that  a  valid  law  must  exist  under  which  the 
coq>oration  could  have  been  organized,  otherwise 
a  corporation  cannot  exist  even  de  facto.  A  de  facto 
corporation  can  never  be  recognized  in  violation  of 
positive  law.^^ 

On  the  other  hand  it  has  been  held  in  some  cases 
that  the  assmnption  and  exercise  of  corporate  powers 
under  an  unconstitutional  statute  creates  a  de  facto 
corporation,^^  but  it  is  believed  that  this  statement  is 
too  broad,  and  the  cases  so  holding  are  easily  dis- 
tinguished from  the  general  and  almost  unanimous 
weight  of  authority. 

"  Where  a  corporation  exists  de  facto,  and  in  fact  ex- 
ercises corporate  powers,  the  question  whether  it  ex- 
ercises such  powers  lawfully  cannot  be  litigated  in  a 
collateral  proceeding  between  private  parties  or  be- 
tween a  private  party  and  a  corporation;  the  question 
can  only  be  litigated  between  the  corporation  and  the 
State.  The  tenn  '  collateral  proceeding,'  in  the  state- 
ment of  this  principle,  is  used  to  designate  cases  where 
the  question  of  the  existence  of  the  corporation  is  in- 
cidental or  collateral  to  the  main  object  of  the  suit, 
and  the  oft-repeated  reason  of  the  rule  is  the  incon- 
venience of  trying  the  question  of  the  right  of  an  as- 
sumed corporation  to  exist,  where  the  question  arises 
as  a  mere  incident  to  a  private  litigation,  and  where 
the  State,  which  is  chiefly  interested  in  the  question, 
is  willing  that  it  should  exist."  ^^ 

The  question  of  corporate  existence  must  be  raised 
by  the  State  itself.  This  may  be  done  by  quo  warranto 
proceedings,  by  a  writ  of  scire  facias,  or  by  the  plea  of 

37.  Jones  v.  Aspen  Hardware  Co.,  21  Colo.  263;  Georgia,  etc., 
Rv.  Co.  V.  Mercantile,  etc..  Co..  94  Ga.  306;  Chicora  Co.  v.  Crews, 
C'S.  C.  243;  Bradley  v.  Rcppoll,  133  Mo.  545. 

38.  Coxe  V.  State.  144  X.  Y.  30G :  Rmith  v.  Sheeley.  12  Wall. 
(83  U.  S.)   .358;  Wingot  v.  Quincy.  etc..  Co..  128  111.  67. 

39.  1  Thompson  on  Corporations.  §  502,  and  cases  cited. 


COKPOEATIONS  BY  ESTOPPEL.  27 

nul  tiel  corporation;  or  an  express  act  of  the  legisla- 
ture may  forfeit  the  charter.  If  it  he  done  by  way  of 
one  of  these  writs,  the  court  must  decide.  Until  a 
competent  judicial  authority,  in  a  direct  proceeding  by 
the  State,  or  the  legislature  has  expressly  declared  to 
the  contrary,  the  corporation  still  exists  as  to  third 
persons. 

The  decisions  affecting  the  question  of  de  facto  cor- 
porations throughout  the  United  States  are  numerous 
and  conflicting  in  their  views  and  theories.  It  is  be- 
lieved, however,  that  the  weight  of  authority  is  in  favor 
of  the  Dropositions  advanced. 

CORPOEATIONS  BY  EsTOPPEL. 

§  19.  It  has  already  been  stated  that  where  third 
parties  deal  with  a  corporation  as  such  they  are 
estopped  from  denying  the  existence  of  the  corpora- 
tion.^ The  rule  works  both  ways,  and  a  corporation 
cannot,  in  an  action  against  it,  set  up  the  fact  of  non- 
incorporation.*^  iSo,  too,  a  shareholder  is  prevented 
from  denying  the  existence  of  his  corporation  on  the 
ground  of  estoppel.*^ 

These  statements,  unquestionably  law,  have  caused 
a  judicious  and  able  writer  on  the  subject  to  coin  the 
expression  "  corporations  by  estoppel."  '*^  It  will  be 
noted  that  the  expression  is  of  value  only  as  between 
the  cor|:)oration,  its  shareholders,  and  third  parties,  or 
the  public.  It  can  have  no  meaning  as  between  the 
State  and  the  corporation,  the  State  having  the  right 
at  all  times  to  step  in  and  question  the  legality  of  the 
corporation. 

40.  Commercial  Bank  v.  PfeiflFer,  108  N.  Y.  242;  Chubb  v. 
Upton,  95  U.  S.  665;  Bank  v.  McDonald,  130  Mass.  264. 

41.  Ewincr  V.  Robeson,  15  Ind.  26;  Rush  v.  Steamboat  Co.,  84 
N.  C.  702 ;   De  Witt  v.  Hastings,  40  N.  Y.  Super.  Ct.  463. 

42.  Slocum  V.  Pipe  Co.,  10  R.  I.  112,  116. 

43.  See  Thompson  on  Corporations   (vol.  1),  §§  518-533. 


28  SUMMAUY    OF    LAW    OF    PRIVATE    COKPOKATIOXS. 

There  are  exceptions  to  the  rules  above  stated,  how- 
ever. Tho  subject  is  limited  to  cases  of  de  facto  cor- 
porations, and  it  seems  that  if  there  be  no  law  authoriz- 
ing the  creation  of  the  corporation,^  or  the  corpora- 
tion has  expired  by  lapse  of  time,  the  exercise  of  cor- 
porate powers  may  be  questioned  collaterally.'*^ 

44.  Heaston  v.  Cincinnati  Ry.  Co.,  16  Ind.  275;  Thompson, 
§  523. 

45.  Mumma  v.  Potomac  Co.,  8  Pet.  (33  U.  S.)  281;  Thompson, 
§  530. 


CHAPTER  III 

The  Corpokation  and  the  State. 

§  20.  The  dominant  principle  underlying  our  govern- 
ment is  that  all  men  have  a  natural  and  inherent  right 
to  life,  liberty,  and  property,  and  that  any  interference 
with  this  inherent  right  cannot  be  justified  except  as  a 
means  of  securing  the  most  effectual  enjoyment  of  these 
rights  to  all.  This  principle  has  received  the  sanction 
of  the  law  of  our  land,  by  being  enacted  into  constitu- 
tional form,  and  appears  in  all  of  its  phases  in  the 
United  States  Constitution,  and  thence  incorporated  in 
the  various  State  Constitutions.  So  far  as  these  affect 
corporations,  they  may  be  found  in  the  United  States 
Constitution,  as  follows : 

Sec.  10,  art.  I.  "  N"o  State  shall  *  *  *  pass  any 
■'^  *  *  law  impairing  the  obligation  of  contracts." 
Fifth  Amendment: — 'Ro  person  shall  "  be  deprived  of 
life,  liberty,  or  property  without  due  process  of  law;  nor 
shall  private  property  be  taken  for  public  use  without 
just  compensation." 

Fourteenth  Amendment : —  iN"©  State  shall  "  deprive 
any  person  of  life,  liberty,  or  property  without  due 
process  of  law,  nor  deny  to  any  person  within  its  juris- 
diction the  equal  protection  of  laws." 

The  first  question  involved  under  the  subject  of  this 
chapter  is,  What  is  the  relationship  created  between  the 
State  and  the  corporation,  by  the  granting  of  the  fran- 
chise or  charter,  and  the  acceptance  thereof  by  the  cor- 
poration ?  A  franchise  is  defined  by  Bouvier  as  "  a  par- 
ticular privilege  conferred  by  grant  from  government, 
and  vested   in   individuals."  ^      Granted  by   sovereign 

1.  1  Bouvier   (15th  ed.),  687,  citing  3  Kent,  458. 

[29] 


30         SUMMARY    OF    L<\.W    OF    PRIVATE    CORPORATIONS. 

power,  it  can  be  forfeited  and  taken  away  by  the  same 
power,  unless  the  sovereign  power  be  confined  by  a  writ- 
ten constitution.  It  here  becomes  important  to  note  a 
distinction  between  a  grant  of  a  corporate  franchise  and 
a  grant  of  mere  personal  privileges  to  individuals.  In 
our  law,  the  former  grant,  extended  to  the  incorporators 
and  accepted  by  them,  has  been  declared  to  be  a  contract 
which  is  protected  by  the  Constitution,  while  the  latter 
are  not  so  protected,  and  may  be  withdrawn  by  the  sov- 
ereign power,  at  will.  The  early  decisions  of  the  State 
courts  did  not  take  this  ground,  nor  draw  this  distinc- 
tion, but  declared  that  no  such  distinction  existed.  But 
the  United  States  Court  declared,  in  the  famous  Dart- 
mouth College  Case,  decided  in  1819,  that  a  franchise 
or  charter  was  a  contract  within  the  protection  of  section 
10,  article  I  of  the  Constitution,  and,  as  such,  no  State 
could  pass  laws  impairing  the  obligations  of  such  con- 
tracts. Modern  text-writers  and  the  best  legal  minds 
unite,  to-day,  in  declaring  this  case  to  be  wrong.  In  the 
decisions  handed  do\\Ti  by  Marshall,  C.  J.,  and  Story, 
J.,  no  exact  terms  of  contract  were  pointed  out,  and  it  is 
apparent  that  a  contract  was  assumed  by  them.  It  was 
impliedly  held  a  contract  on  the  ground  that  the  agree- 
ment between  the  donors  and  the  beneficiaries,  of  which 
the  trustees  are  the  legal  guardian,  might  in  some  way 
be  impaired.  The  essential  elements  of  a  contract  are 
wanting.  The  franchise  is  merely  a  legal  right,  or  priv- 
ilege, given  without  compensation.  Of  course,  a  fran- 
chise might  be  a  contract,  were  consideration  given  for 
it,  and  the  relationship  thus  expressly  created.  But  it 
were  as  well  to  say  that  a  treaty  entered  into  between 
two  countries  is  a  contract,  when  all  agree  that  it  may  be 
cut  short  by  the  same  power  that  made  it.  But  while  the 
court  was  wrong  in  the  decision,  it  is  nevertheless  true 
that  the  flecision  has  been  binding  law  in  this  country 
from  that  day  to  this.    "  The  doctrine  thus  settled  is  that 


THE  COEPOEATION  AND  THE  STATE.        31 

whenever  the  sovereign  power  for  the  time  being  and 
within  the  legitimate  sphere  of  action  grants  to  a  body 
of  men  the  franchise  of  a  corporation,  or  any  other 
species  of  franchise,  privilege,  or  license  in  the  nature  of 
property,  and  the  grantees  accept  the  grant,  such  fran- 
chise, privilege,  or  license  is  within  the  constitutional 
protection  in  such  a  sense  that  it  cannot  thereafter  be 
repealed  or  revoked  by  any  form  of  State  action  against 
the  consent  of  the  corporation."  ^ 

The  exact  question  to-day  is  of  little  importance  to  us 
because  immediately  upon  the  handing  down  of  this 
decision,  every  State  enacted  legislation  w^hich  took  the 
franchise  out  of  the  domain  of  contract,  by  declaring 
that  all  franchises  gTanted  thereafter  should  be  subject 
to  repeal  or  alteration.  It  is  this,  perhaps,  Avhich  has 
caused  the  peculiar  doctrine  to  remain  in  tact  to  this 
day. 

But  whether  there  be  a  contract  between  the  State 
and  the  corporation  or  not,  there  is  always  the  contract 
between  the  members  of  the  corporation,  which  contract 
finds  its  foundation  in  the  franchise  issued  by  the  State. 
The  shareholders  mutually  agree  to  unite  for  the  pur- 
poses indicated  in  the  charter,  each  agreeing  to  con- 
tribute his  proportionate  share  and  thereby  become  en- 
titled to  a  share  in  the  profits  and  management.  This  is 
a  contract,  and  as  such  comes  within  the  constitutional 
prohibition.  States  may  not  impair  this  contract,  for  to 
do  so  would  be  to  take  away  property  rights  which  are 
protected  by  the  Constitution,  in  that  it  would  be  done 
without  due  process  of  law  and  without  just  compensa- 
tion. But  this  entire  doctrine  of  contract  is  qualified  in 
four  ways,  so  far  as  trading  or  business  corporations  are 
concerned. 

(a)   By  the  reservation  of  a  right  to  repeal,  alter  or 
amend  the  franchise  or  charter. 

2.  4  Thompson,  §  5381.     See  also  article  26  Am.  Law  Rev.  172. 


32  SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

(b)  Bv  repealing  or  altering  prior  to  acceptance  by 

the  incorporators. 

(c)  By  the  police  power  and 

(d)  By  eminent  domain. 

Interpeetatiox  of  Charters. 

§  21.  The  charter  of  a  corporation  usually  defines  its 
rights,  powers,  and  acts.  In  the  interpretation  of  these 
charters,  the  general  rule  is  that  they  should  be  construed 
neither  strictly  nor  liberally,  but  according  to  the  fair 
and  natural  import  of  it,  with  reference  to  the  purposes 
and  objects  of  the  cori:)oration.^  But  a  distinction  must 
here  be  made  between  the  ordinary  business  or  trading 
corporation  and  a  quasi-public  corporation.  In  the 
latter,  duties  are  owing  to  the  public,  and  the  public  is 
entitled  to  any  and  all  benefits  that  are  impliedly  or 
constructively  in  its  favor.  In  other  words,  if  the  dis- 
pute is  one  in  which  the  contention,  if  secured,  would  be 
against  common  right,  then  the  usual  and  general  rule 
is  to  construe  the  charter  strictly  and  in  favor  of  the 
public,  but  not  to  the  extent  of  impairing  or  defeating 
the  objects  of  the  corporation.^  In  this  particular  no 
exclusive  privilege,  no  sanction  to  smother  competition, 
no  divesting  of  rights  to  make  public  improvements  will 
be  implied  on  the  part  of  a  corporation.  Unless  such 
rights  appear  in  express  words,  public  policy  forbids 
their  implication.  "  The  whole  community  are  inter- 
ested in  this  inquiry,  and  they  have  a  right  to  require 
that  the  power  of  promoting  their  comfort  and  of  ad- 
vancing the  public  prosperity  *  *  *  shall  not  be 
construed  to  have  been  surrendered  or  diminished  by  the 
State  unless  it  shall  appear  by  plain  words  that  it  was 
intended  to  be  done."  ^     To  this  end  a  State  may  use 

3.  Enfield  Bridge  Co.  v.  Railway  Co..  17  Conn.  454. 

4.  Do^^^^in£r  v.  Mt.  Wash.  Co.,  40  N.  H.  230;  Strowbridge  Canal 
Co.  V.  \^Tnoelinr,  2  B.  &  A.  792. 

5.  Storv.  ■!.,  in  Charles  River  Bridge  Co.  v.  Warren  Bridge 
Co.,  11  Pet.  420. 


INTEEPKETATION    OF    CHAETEK.  33 

its  power  in  the  welfare  of  its  citizens,  pass  such  regu- 
lations and  create  new  corporations ;  may  even  divest 
vested  rights,  so  long  as  it  does  not  impair  the  obligation 
of  contracts.®  For  legislative  grants  are  not  to  be  en- 
forced or  enlarged  beyond  the  fair  meaning  of  the 
lang-uage  used.  "All  rights  which  are  asserted  against 
the  State  must  be  clearly  defined  and  not  raised  by  in- 
ference or  presumption  ;  and  if  the  charter  is  silent  about 
a  power,  that  power  does  not  exist.  If,  on  a  fair  read- 
ing of  the  instrument,  reasonable  doubts  arise  as  to  the 
proper  interpretation  to  be  given  it,  those  doubts  are  to 
be  solved  in  favor  of  the  State,  and  where  it  is  suscep- 
tible of  two  meanings,  the  one  restricting  and  the  other 
extending  the  powers  of  the  corporation,  that  construc- 
tion is  to  be  adopted  which  works  the  least  harm  to  the 
State.  But  if  there  is  no  ambiguity  in  the  charter  and 
the  powers  conferred  are  plainly  marked,  and  their 
limits  can  be  readily  ascertained,  then  it  is  the  duty  of 
the  court  to  sustain  and  uphold  it,  and  to  carry  out  the 
true  meaning  and  intention  of  the  parties  to  it."  "^ 

The  Power  to  Repeal,  Alter,  or  Amend. 

§  22.  The  power  to  repeal,  alter,  or  amend  a  charter 
on  the  part  of  the  State  was  for  the  purpose  of  obviating 
the  Dartmouth  College  rule,  and  is  simply  a  reservation 
by  the  State  for  the  benefit  of  the  public,  and  can  be 
exercised  and  taken  advantage  of  only  by  the  State.^ 
This  reservation  qualifies  the  grant  of  a  charter,  pre- 
vents it  from  becoming  a  contract  in  fact,  though  if  it 
still  be  insisted  that  a  charter  is  a  contract,  this  reser- 
vation becomes  part  and  parcel  of  it,  the  charter  being 
accepted  subject  to  it. 

6.  See  Providence  Bank  v.  Billings,  4  Pet.   (29  U.  S.)   514. 

7.  Davis,   J.,    in   Binghanipton   Bridge   Co.   Case,   3   Wall.    (70 
U.  S.)    51;  Parrott  v.  City  of  Lawrence,  2  Dill.    (U.  S.  C.)    332. 

8.  Zabriskie  v.  Baldwin,  18  N.  J.  Eq.  178. 

3 


3-i  SUMMAKY    OF    LAW    OF    PRIVATE    COKPOKATIONS. 

The  answer  to  the  question  as  to  how  this  power  may 
be  exercised  will  depend  upon  the  language  of  the 
reserving  statute.  If  it  appear  to  be  "  at  the  pleasure 
of  the  legislature,"  as  it  did  originally  in  the  Massa- 
chusetts statute,  or  states  that  the  legislature  may  alter 
or  revoke  whenever,  "  in  their  opinion,"  it  may  be  in- 
jurious, and  others  equally  as  strong,  the  power  may  be 
exercised  summarily  and  without  limitation  or  re- 
striction.^ 

But  let  the  question  be  decided  as  it  may,  it  stands  to 
reason  that  a  legislature  cannot  force  an  amendment  or 
alteration  upon  a  corporation' unless,  the  corporation  sees 
fit  to  accept  it.  The  corporation  may  decide  to  dissolve, 
and  for  this  reason  the  amendment  or  alteration  becomes 
operative  only  upon  its  acceptance.  ^^ 

Subject  to  the  peculiar  phraseology  of  the  statutes 
above  stated,  however,  the  general  rule  seems  to  be  that 
the  power  of  the  legislature  is  limited.  The  power  can- 
not be  so  exercised  as  to  destroy  rights  which  have  be- 
come vested  under  the  charter,  except  those  rights  are 
within  the  direct  terms  of  the  charter,  nor  can  it  be 
exercised  unless  some  public  interest  demands  it. 

§  23.  Extent  of  the  power. — "  Personal  and  real 
property  acquired  by  the  corporation  during  its  lawful 
existence,  rights  of  contracts  or  choses  in  action  so 
acquired,  and  which  do  not  in  their  nature  depend  upon 
the  general  powers  conferred  by  the  charter,  are  not 
destroyed  by  such  a  repeal ;  and  the  courts  may,  if  the 
legislature  does  not  provide  some  special  remedy,  en- 
force such  rights  by  the  means  within  their  power. 
The  rights  of  the  shareholders  of  such  a  corporation 
to  their  interests  in  its  property  are  not  annihilated  by 
such  a  repeal,  and  there  must  remain  in  the  courts  the 
power  to  protect  those  rights."  " 

9.  Lothrop  V.  Stodman.  42  Conn.  583. 

10.  Sa?e  V.  Dillanl.  1."^  B.  Mon.    (Kv.)    340. 

11.  Grecmvood  v.  Freight  Co.,  105  U.  S.  13. 


POWER  TO  EEPEAL  AND  ALTER.  35 

"  The  principle  *  *  *  is  that  the  legislature  may 
change  or  modify  the  privileges  and  franchises  which 
the  State  has  gTanted  to  the  corporation,  and  which  con- 
cern the  interests  of  the  public ;  but  dealing  with  what  it 
has  bestowed,  either  by  way  of  withdrawal  or  of  alter- 
ation, the  State  may  not  go  further,  and  so  legislate  as  to 
disturb,  affect,  or  impair  rights  either  of  the  corporation 
or  of  its  shareholders,  previously  acquired,  while  the 
corporate  functions  were  being  lawfully  exercised.  All 
rights  thus  acquired,  of  whatever  character,  are  sur- 
rounded and  protected  by  constitutional  sanctions  and 
guaranties  higher  and  superior  to  the  legislative  power 
of  amendment  or  repeal."  ^^ 

The  extent  of  this  reserved  power  to  repeal  or  alter 
may  be  stated  as  follows :  Repeal  may  be  had  for  mis- 
use or  abuse  ;^^  alterations  and  amendments  may  bo 
made  when  necessary  to  carry  into  effect  or  accomplish 
the  purposes  for  which  the  charter  was  obtained.-^^ 
Such  alterations  and  amendments  may  be  within  the 
scope  of  the  subjects  of  taxation  and  the  police  power; 
they  may  be  penal  in  their  nature,  or  of  any  other 
nature  affecting  the  rights,  privileges,  and  immunities 
derived  by  its  charter  directly  from  the  State. 

As  affecting  contracts,  the  rule  is  a  general  one  that 
the  legislature  may  not  deprive  the  beneficiaries  under 
the  corporation  of  its  property,  or  interfere  with  or 
annul  its  contracts  with  third  persons,  except  so  far  as 
executory  contracts  are  necessarily  determined  by  the 
termination  of  the  existence  of  the  corporation.'^^ 

An  interesting  question  here  arises  as  to  corporations 
vested  with  rights  and  privileges  which  are  secondary 
in  their  nature,  resting  as  they  do  upon  the  primary 

12.  Hill  V.  Glasgow  Ry.  Co.,  41  Fed.  610. 

13.  Erie,  etc.,  Ry.  Co.  v.  Casey.  26  Pa.  St.  287. 

14.  Covington  v.  Covinsrton  Bridge  Co..  10  Bush    fKy.).  60. 

15.  4  Thompson.  §  5414.  citino:  New  York  v.  Twentv-third  St. 
Rv.  Co..  113  N.  Y.  311,  etc.;  Mumma  v.  Potomac  Ry.  Co.,  8  Pet. 

(33  U.  S.)    281. 


3G  SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

right  to  be  a  corporation.  An  illustration  of  such  a  seo- 
ondary  franchise  may  be  found  in  a  corporation  char- 
tered with  power  to  operate  a  railroad  in  the  streets  of 
a  city.  The  original  charter  carries  with  it  the  right 
to  existence  as  a  corporation.  The  right  to  use  the 
streets  must  come  from  the  municipality,  and  may  be 
termed  a  secondary  franchise. 

Suppose  the  primary  franchise  to  be  extinguished 
either  by  repeal  or  limitation,  does  the  secondary  fran- 
chise still  remain  to  the  estate  of  the  corporation  ? 
In  Greenwood  v.  Freight  Company  the  court  said: 
"  Whatever  poM^er  is  dependent  solely  upon  the  grant  of 
the  charter,  and  which  could  not  be  exercised  by  unin- 
corporated private  persons  under  the  general  laws  of  the 
State,  is  abrogated  by  the  repeal  of  the  law  which 
granted  these  special  rights."  And  this  is  in  accord  with 
the  general  rules  of  interpretation  which  have  obtained 
from  a  very  early  period,  and  has  the  virtue  of  the 
weight  of  authority  behind  it.  Yet  in  New  York  it 
seems  that  such  a  grant  is  to  bo  construed  to  be  in  the 
nature  of  an  estate  in  fee  in  real  property,  and  this  sec- 
ondary franchise  received  from  a  municipality  to  oper- 
ate a  railroad  in  the  streets  of  a  city  is  declared  to  be 
a  grant  in  perpetuity,  even  though  the  primary  fran- 
chise was  granted  for  a  limited  period  only  and  was 
eventually  taken  away  for  gross  abuse  and  corruption. ^^ 
In  tlie  light  of  precedent,  the  decision  has  no  substan- 
tial foundation,  and  is  not  likely  to  become  the  law 
outside  of  tlie  State  of  Xew  York. 

"  Personal  and  real  property  acquired  by  the  corpora- 
tion during  its  lawful  existence,  rights  of  contract,  or 
choses  in  action  so  acquired,  and  which  do  not  in  their 
nature  depend  upon  the  general  powers  conferred  by 
the  charter,  are  not  destroyed  by  such  a  repeal ;  and  the 
courts  may,  if  the  legislature  does  not  provide  some 

16.  People  V.  O'Brien,  111  N.  Y.  1. 


I 


THE    POLICE    POWER.  37 

special  remedy,  enforce  such  rights  by  the  means  within 
their  power."  ^^ 

§  24.  Repealing  or  altering  prior  to  acceptance  by  the 
incorporators. —  It  is  self  evident  that  this  may  be  done ; 
and  under  any  principle,  whether  of  contract  or  license 
or  privilege;  an  offer  may  be  withdra'^Ti  or  altered  be- 
fore acceptance.  iSo,  too,  a  license  or  privilege  ex- 
tended may  be  altered  or  repealed. 

The  Police  Powek. 

§  25.  Definition  and  scope. —  "  There  is  a  power  abid- 
ing within  the  State  to  legislate  so  as  to  affect  the  cor- 
porate powers  conferred  by  charter  or  statute,  although 
such  power  may  not  be  specially  reserved,  either  in  the 
charter,  the  Constitution,  or  the  general  law.  This  is 
the  power  to  pass  laws  for  the  promotion  of  the  general 
peace,  health,  and  good  order  of  the  community,  which 
laws  are  generally  denominated  police  regulations  J'  ^^ 

"  Many  attempts  have  been  made  in  this  court  and 
elsewhere  to  define  the  police  power,  but  never  with  en- 
tire success.  It  is  always  easier  to  determine  whether 
a  particular  case  comes  within  the  general  scope  of  the 
power  than  to  give  an  abstract  definition  of  the  power 
itself,  which  will  be  in  all  respects  accurate.  ISTo  one 
denies,  however,  that  it  extends  to  all  matters  affecting 
the  public  health  or  the  public  morals. ■^^ 

"  'No  legislature  can  bargain  away  the  public  health 
or  the  public  morals.  The  people  themselves  cannot  do 
it,  much  less  their  servants.  The  supervision  of  both 
of  these  subjects  of  governmental  power  is  continuing 
in  its  nature,  and  they  are  to  be  dealt  with  as  the  special 
exigencies  of  the  moment  require.  Government  is 
organized  with  a  view  to  their  preservation  and  cannot 

17.  Greenwood  v.  Freifrht  Co.,  supra. 

18.  4  Thompson.  §  5470. 

19.  Stone  v.  Miss.,  101  U.  S.  814,  citing  Beer  Co.  v.  Mass.,  97 
U.  S.  25. 


38  SUMMARY    OF    I^VW    OF    PRIVATE    CORrORATIONS. 

divest  itself  of  the  power  to  provide  for  them.  For  this 
purpose  the  largest  legislative  discretion  is  allowed, 
and  the  discretion  cannot  be  parted  with  any  more  than 
the  power  itself."  ^"^ 

The  police  poAver  is  then  an  inalienable  part  of  gov- 
ernment itself,  upon  which  depends  "  the  security  of 
public  order,  the  life  and  health  ©f  the  citizen,  the  com- 
fort of  an  existence  in  a  thickly  populated  community, 
the  enjoyment  of  private  and  social  life,  and  the  bene- 
ficial use  of  property."  ^^ 

Its  limitations  are  indefinable.  "  It  extends  to  the 
protection  of  the  lives,  limbs,  comfort,  and  quiet  of  all 
persons,  and  the  protection  of  all  property  within  the 
State."  22 

Coi*porations  stand  upon  the  same  plane  with  in- 
dividuals in  respect  to  this  power.  Even  though  no 
reservation  clause  exist  in  statute  or  charter,  the  cor- 
poration must  give  way  to  this  power. 

"  Irrevocable  grants  of  property  and  franchises  may 
be  made  if  they  do  not  impair  the  supreme  authority 
to  make  laws  for  the  right  government  of  the  State; 
but  no  legislature  can  curtail  the  power  of  its  success- 
ors to  make  such  laws  as  they  may  deem  proper  in 
matters  of  police."  ^ 

■So  every  grant  of  corporate  power  implies  "  the  con- 
dition that  the  corporation  shall  be  subject  to  such 
reasonable  regulations,  in  respect  to  the  general  con- 
duct of  its  affairs,  as  the  legislature  may  from  time 
to  time  prescribe,  which  do  not  materially  interfere 
"U'ith  or  obstruct  the  substantial  enjoyment  of  the  privi- 
leges the  State  has  granted,  and  serve  only  to  secure 
the  ends  for  whicli  the  corporation  was  created."  ^^ 

20.  Stone  v.  iliss.,  supra. 

21.  Slauphtpr  House  Cases,   16  Wall.    (83  U.  S.)    36. 

22.  Thorpe  v.  Railway  Co..  27  Vt.   140. 

.    23.  Board  of  Excise  v'.  Barrie.  34  N.  Y.  6.=)7. 
24.  Chicago  Ins.  Co.  v.  Needles,  113  U.  S.  574. 


THE  POLICE  POWEK.  39 

§  26.  Limitations  upon. — .But  there  are  limits  to  this 
power.  Xumerous  cases  uphold  the  statement  that  the 
power,  if  exercised,  must  be  reasonable  and  necessary. 

''  It  seems  to  be  universally  agreed  that  there  are 
two  limitations  upon  the  police  power  of  the  legisla- 
ture: (1)  That  the  subject  of  its  exercise  must  have 
some  relation  to  the  peace,  the  health,  the  good  order, 
or  the  morals  of  the  community;  and  (2)  that  it  must 
be  exercised,  at  least,  apparently  or  presumptively, 
upon  grounds  which  are  reasonable  and  necessary."  ^ 

It  has  been  held  that  the  power  properly  extends 
to  the  preservation  of  health,  as  in  laws  regarding 
foods,  drinks,  water  supplies,  fire  limits,  etc.;  to  moral- 
ity, as  in  gambling,  lotteries,  local  option,  etc.;  to  the 
employment  of  women  and  children;  to  the  protection 
of  labor  as  evidenced  by  the  lien  laws,  hours  for  la- 
bor, wages  paid  by  municipalities,  etc.;  to  protection 
of  property,  both  real  and  personal;  to  the  regulation 
of  insurance  rates,  reserves,  etc. ;  and  in  the  matter  of 
railroads,  to  regulations  affecting  the  location  and  con- 
dition of  stations,  speed  of  the  trains,  grades,  heat- 
ing, lighting,  color  blindness,  and  the  fijdng  of  tolls 
and  charges. 

It  is  in  this  last,  the  fixing  of  tolls  and  charges,  that 
limitations  have  been  found,  beyond  which  the^  poKcs 
power  cannot  go.  "  This  power  to  regulate  is  not  a 
power  to  destroy,  and  limitation  is  not  the  equivalent 
of  confiscation.  Under  pretense  of  regulating  fares 
and  freights,  the  State  cannot  require  a  railroad  cor- 
poration to  carry  persons  or  property  without  reward; 
neither  can  it  do  that  which  in  law  amounts  to  a  taking 
of  private  property  for  public  use  without  compensa- 
tion or  without  due  process  of  law."  ^^ 

25.  4  Thompson,  §  5478,  and  cases  cited. 

26.  Raih-oad  Commission  Cases,  116  U.  S.  307.  See  also  Chi- 
caffo,  etc..  Ry.  Co.  v.  Minn..  134  id.  418;  Grand  Trunk,  etc., 
Ry.  Co.  V.  Wellman,  143  id.  339;  Regan  v.  Farmers,  etc.,  Co.,  154 
id.  362. 


40 


SUMMAKY    OF    LAW    OF    PRIVATE    CORrORATIONS. 


Eminent  Domain. 

§  27.  Eminent  domain  is  to  be  distinguished  from 
the  police  power  in  that  the  former  is  but  a  function 
of  or  incident  to  government,  wliile  the  latter  is  part 
and  parcel  of  government  itself.  It  is  thus  distin- 
guished because  it  can  be  delegated  by  the  State,  while 
the  police  poAver  camiot  be  parted  Avith.  "  Under 
every  established  government,  the  tenure  of  property 
is  derived  mediatel}-  or  immediately  from  the  sovereign 
power  of  the  political  body,  organized  in  such  way  as 
the  community  or  State  may  have  thought  proper  to 
ordain,  *  *  *  ^q^  [^  [^  undeniable  that  the  in- 
vestment of  property  in  the  citizen  by  the  government, 
whether  made  for  a  pecuniary  consideration  or  founded 
on  conditions  of  civil  or  political  duty,  is  a  contract 
between  the  State  *  ^^  *  and  the  grantee;  and 
both  parties  are  bound  in  good  faith  to  fulfill  it.  But 
into  all  contracts,  whether  made  between  States  and 
individuals  or  between  individuals  only,  there  enter 
conditions  which  arise  not  out  of  the  literal  terms  of 
the  contract  itself;  they  are  superinduced  by  the  pre- 
existing and  higher  authority  of  the  laws  of  nature, 
of  nations,  or  of  the  community  to  which  the  parties  be- 
long; they  are  always  presumed,  and  must  be  presumed, 
to  be  known  and  recognized  by  all,  are  binding  upon 
all,  and  need  never,  therefore,  be  carried  into  express 
stipulation,  for  this  could  add  nothing  to  their  force. 
Ever)'  contract  is  made  in  subordination  to  them,  and 
must  yield  to  their  control,  as  conditions  inherent  and 
paramount  *  *  *.  Such  a  condition  is  the  right 
of  eminent  domain."  "^ 

This  right  does  not  therefore  impair  any  grant  or 
contract  under  the  Constitution,  and  even  as  private 
property  has  to  give  way  to  it,  so  a  franchise,  or  prop- 

27.  West  River  Bridfre  Co.  v.  Dix,  6  How.   (47  U.  S.)   507. 


EMIi\"ENT  DOMAIN.  41 

erty  acquired  under  a  franchise  right,  is  no  more 
sacred,  and  must  be  held  subject  to  it.  "]^otwith- 
standing  the  grant  to  individuals,  the  eminent  domain, 
the  highest  and  most  exact  idea  of  property,  remains 
in  the  government,  or  in  the  aggregate  body  of  the 
people  in  their  sovereign  capacity;  and  they  have  the 
right  to  resume  the  possession  of  the  property  in  the 
manner  directed  by  the  Constitution  and  laws  of  the 
State,  whenever  the  public  interest  requires  it.  This 
right  of  resumption  may  be  exercised,  not  only  where 
the  safety,  but  also  where  the  interest,  or  even  the  ex- 
pediency of  the  State  is  concerned."  ^^ 

A  long  line  of  decisions  uphold  the  statement  that 
the  State  may  confer  this  right  to  take  private  property 
for  a  public  use  upon  private  corporations  of  a  quasi- 
public  nature.  But  these  private  corporations  must 
have  as  their  object  some  public  service.  The  most 
familiar  illustrations  are  those  of  railroad  or  canal,  or 
highway  building,  but  from  the  statements  made  un- 
der the  heading  "  Interpretation  of  Charters  "  it  may 
be  readily  seen  that  the  right  is  not  parted  with  by 
the  State  without  express  words. 

Two  conditions  as  to  the  taking  of  private  property 
under  eminent  domain  are  imposed  by  the  Constitution. 
"  Private  property  shall  not  be  taken  for  a  public  use 
without  just  compensation."  This  has  been  inter- 
preted to  mean  that  the  right  may  not  authorize  the 
taking  of  private  property  except  for  a  public  use.^^ 

Secondly,  this  taking  of  property  for  a  public  use 
can  be  authorized  only  upon  the  payment  of  just 
compensation.^*^ 

The  question  of  the  necessity  or  expediency  of  the 
taking  under  this  right  is  one  which  belongs  exclusively 

28.  Chancellor  Walworth  in  3  Paige's  Ch.   73. 

29.  Beokniaii  v.  Saratoga,  etc.,  Ry.  Co.,  3  Paige's  Ch.  45. 

30.  State  v.  Con.  Coal  Co.,  46  Md.  1. 


42       SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

to  the  legislature.^^  But  the  question  whether  the  use 
is  a  public  one  is  one  which  belongs  to  the  courts.^" 

It  has  been  stated  that  in  respect  to  this  power  the 
property  of  a  coii:)oration  is  no  more  sacred  than  the 
property  of  an  individual,  and  may  be  taken  for  pub- 
lic uses,  even  to  the  extent  of  the  franchise,  and  ex- 
clusive privileges  may  thus  be  taken.^^ 

But  one  coqioration  cannot  acquire  the  right  to  con- 
denm  the  franchise  and  property  of  another  doing  the 
same  business,^'*  unless  the  property  of  such  coi-poration 
bo  not  in  use  or  unnecessary  to  the  proper  exercise  of 
its  franchise.^ 

CoxTROL  Over  Foreign  Corporations. 

§  28.  It  has  already  been  stated  that  a  corporation 
is  not  a  "  person  "  or  "  citizen  "  wdthin  the  meaning 
of  the  Constitution  granting  to  citizens  of  one  State 
the  same  privileges  and  immunities  enjoyed  by  citizens 
of  other  States.^*^ 

"ISTow  a  grant  of  a  coi^Dorate  existence  is  a  grant 
of  special  privileges  to  the  corporators,  enabling  them 
to  act  for  certain  designated  purposes  as  a  single  in- 
dividual, and  exempting  them  (unless  otherwise 
specially  provided)  from  individual  liability.  The  cor- 
poration, being  the  mere  creation  of  local  law,  can  have 
no  legal  existence  beyond  the  limits  of  the  sovereignty 
where  created.  As  said  by  this  court  in  Bank  of  Au- 
gusta V.  Earle,  'It  must  dwell  in  tlie  place  of  its  crea- 

31.  Talbot  V.  Hudson,  16  Grav  (Mass.).  417;  Harris  v. 
Thompson.  9  Barb.  (N.  Y.)  350;  Re  ToA\Tisend,  39  N.  Y.  171; 
De  Varaigiie  v.  Fox,  2  Blatchf.    (U.  S.  C.)    9.5. 

32.  Concord  Rv.  Co.  v.  Greely,  17  N.  H.  47;  Stockton,  etc., 
Co.  V.  Stockton, '41  Cnl.  147:  Re  Deansrille  Cemetery  Co.,  66 
N.  Y.  569;   Boston  Ry.  Co.  v.  Salem  Ry.  Co.,  2  Gray   (Mass.).  1. 

33.  New  Orleans,  etc.,  Co.  v.  Louisiana,  etc.,  Co.,  115  U.  S. 
650,  and  cases  cited. 

34.  Mobile  Rv.  Co.  v.  Midland  Rv.  Co.,  87  Ala.  501. 

35.  N.  Y.,  etc..  Co.  v.  Boston,  etc.,  Co.,  36  Conn.  196;  Re  N.  Y., 
etc..  Rv.  Co.,  99  X.  Y.  12. 

36.  Paul  V.  Virginia,  8  \Vall.   (75  U.  S.)   168. 


COXTKOL    OVER    FOKEIG^^    COEPOEATIONS.  43 

tion,  and  cannot  migrate  to  another  sovereignty.'  The 
recognition  of  its  existence,  even,  by  other  States,  and 
the  enforcement  of  its  contracts  made  therein  depend 
purely  upon  the  comity  of  these  States,  a  comity  whicli 
is  never  extended  where  the  existence  of  the  corpora- 
tion or  the  exercise  of  its  powers  are  prejudicial  to 
their  interests  or  repugnant  to  their  policy.  *  *  * 
At  the  present  day  coi-porations  are  multiplied  to  an 
almost  indefinite  extent.  There  is  scarcely  a  business 
pursued  requiring  the  expenditure  of  large  capital,  or 
the  union  of  large  numbers,  that  is  not  carried  on 
by  corporations.  It  is  not  too  much  to  say  that  the 
wealth  and  business  of  the  country  are  to  a  great  ex- 
tent controlled  by  them.  And  if,  when  composed  of 
citizens  of  one  State,  their  corporate  powers  and  fran- 
chises could  be  exercised  in  other  States  without  re- 
striction, it  is  easy  to  see  that,  with  the  advantages 
thus  possessed,  the  most  important  business  of  those 
States  would  soon  pass  into  their  hands.  The  princi- 
pal business  of  every  State  would,  in  fact,  be  con- 
trolled by  corjx)rations  created  by  other  States." 

'•  It  follows  from  these  principles  that  a  State,  in 
granting  a  corporate  privilege  to  its  own  citizens,  or, 
what  is  equivalent  thereto,  in  pennitting  a  foreign  cor- 
poration to  become  one  of  its  constituent  elements  of 
a  consolidated  corporation  organized  under  its  laws, 
may  impose  such  conditions  as  it  deems  proper,  and 
that  the  acceptance  of  the  franchise  in  either  case  im- 
plies a  submission  to  the  conditions  without  which  the 
franchise  could  not  have  been  obtained.  In  Paul  v. 
Virginia,  supra,  the  court  said :  "  Having  no  absolute 
right  of  recognition  in  other  States,  but  depending  for 
such  recognition  and  the  enforcement  of  its  contracts 
upon  their  assent,  it  follows,  as  a  matter  of  course, 
that  such  assent  may  be  granted  upon  such  terms  and 
conditions  as  those  States  may  think  proper  to  impose. 


44       SUMMARY    OF    LAW    OF    PEIVATE    CORPORATIONS. 

They  may  exclude  the  foreign,  corporation  entirely; 
they  may  restrict  its  business  to  particular  locaUties, 
or  they  may  exact  such  security  for  the  performance 
of  its  contracts  with  their  citizens  as  in  their  judgment 
will  best  promote  the  public  interest."  " 

Taxation. 

§  29.  Defined. —  Taxes  are  defined  to  be  burden?  or 
charges  imposed  by  the  legislative  power  upon  persons 
or  property  to  raise  money  for  public  purposes.  The 
power  to  tax  rests  upon  necessity  and  is  inherent  in 
every  sovereignty.  The  legislature  of  every  free  State 
will  possess  it  under  the  general  grant  of  legislative 
power,  whether  particularly  specified  in  the  Constitu- 
tion among  the  powers  to  be  exercised  by  it  or  not,"  ^^ 

"  AVhilo  taxation  is  in  general  necessary  for  the  sup- 
port of  government,  it  is  not  part  of  the  government 
itself.  Government  was  not  organized  for  the  puq^ose 
of  taxation,  but  taxation  may  be  necessary  for  the  pur- 
poses of  government.  As  such,  taxation  becomes  an 
incident  to  the  exercise  of  the  legitimate  fimctions  of 
government,  but  nothing  more.  Xo  government  de- 
pendent on  taxation  for  support  can  bargain  away  its 
whole  power  of  taxation,  for  that  Avould  be  substan- 
tially abdication.  All  that  has  been  determined  thus 
far  is,  that  for  a  consideration  it  may,  in  the  exercise 
of  a  reasonable  discretion,  and  for  the  public  good, 
surrender  a  part  of  its  powers  in  this  particular."  ^^ 

§  30.  Corporate  property  subject  to. —  Franchises  of 
corporations  are  property  and  as  such  are  subject  to 
taxation  by  the  State  quite  as  the  property  of  an 
individual. 

37.  Wliitp.  J.,  in  Ashley  v.  Ryan,  153  U.  S,  436,  citing  Paul 
V.  Virpinia,  and  other  leadinp  cases. 

38.  Cnolevs  Cnnst.  Lim.    (fith  ed.)    587. 

39.  Stone  v.  Miss.,  101  U.  S.  814. 


TAXATION. 


45 


"  Corporate  franchises  *  *  *  are  legal  estates, 
and  not  mere  naked  powers  granted  to  the  coi-poration, 
but  powers  coupled  with  an  interest,  which  vest  in  the 
corporation  by  virtue  of  their  charter;  and  the  rule 
is  equally  well  settled  that  the  privileges  and  fran- 
chises of  a  private  corporation,  *  *  *  are  as  much 
the  legitimate  subjects  of  taxation  as  any  other  prop- 
erty of  the  citizens  mthin  the  sovereign  power  of  the 
State."  *° 

But  having  once  gained  the  right  to  tax  franchises 
as  property,  the  States  found  themselves  in  a  predica- 
ment on  account  of  the  usual  constitutional  enactments 
requiring  all  taxes  to  be  equal  and  uniform.  Inas- 
much as  the  corporation  paid  the  usual  local  taxes 
upon  its  real  and  personal  property,  the  placing  of 
an  additional  tax  upon  its  franchise  as  property,  it 
was  contended,  amounted  to  double  taxation.  The 
question  then  directly  arose.  Is  the  tax  to  be  regarded 
as  one  upon  the  franchise,  or  upon  the  property?  The 
question  has  been  uniformly  decided  that  it  is  a  tax 
upon  franchises  and  not  on  property,  as  the  Constitu- 
tions of  those  States  prohibiting  unequal  taxation  of 
property  does  not  prohibit  the  laying  of  indirect  taxes 
upon  pri\aleges,  or,  in  other  words,  franchises.^^ 

There  are  limitations  to  the  power  of  the  State  to 
tax  franchises,  however.  It  has  been  held,  for  in- 
stance, that  a  State  cannot  tax  franchises  granted  by 
the  United  States,^^  nor  can  it  tax  the  business  of  cor- 
porations engaged  in  interstate  commerce,^^  nor  can 
it  tax  upon  that  portion  of  the  capital  stoak  employed 
in  business  outside  of  the  State.^^ 

40.  Hamilton  Co.  v.  Mass.,  G  Wnll.   (73  U.  S.)   632. 

41.  Hamilton  Co.  v.  Mass..  6  Wall.  (73  U.  S.)  632;  Society, 
etc.  V.  Coite,  id.  594:  Provident  Inst.  v.  Mass.,  id.  611;  Osborn 
V.  Bank  of  U.  S.,  9  Wheat.  738. 

42.  California  v.  Central  Pac.  Rv.  Co.,  127  U.  S.  1. 

43.  Tel.  Co.  V.  Texas,  105  U.  S.  460. 

44.  People  v.  Equitable  Trust  Co.,  96  N.  Y.  388.  See  also  15 
Wall.  (82  U.  S.)  300. 


4G       SUMMARY    OF    I>AW    OF    PRIVATE    CORPOKATIOXS. 

§  31.  Methods  of. —  Subject  to  these  limitations  the 
laying  of  taxes  upon  franchises  seems  to  be  dis- 
cretionary with  the  legislature.  These  .taxes  take 
different  forms  in  different  States,  and  include  such 
methods  as  taxing  gross  earnings,  dividends,  capi- 
tal stock,  or  net  earnings.  In  j^ew  Jersey  the 
general  franchise  tax  is  a  graded  one  on  capital 
stock,  while  special  coqDorations  pay  a  tax  on 
gross  receipts,  etc.  In  i^ew  York  the  franchise 
tax  is  based  on  dividends,  and  if  no  dividends  are  paid, 
then  upon  the  capital  stock  employed  within  the  State. 
In  Illinois,  Indiana,  and  Massachusetts  the  franchise 
tax  is  based  on  the  excess  of  the  market  value  of  their 
capital  over  the  real  value  of  the  tangible  property. 
All  of  these  methods  have  received  the  sanction  of 
the  highest  courts,  and  have  been  declared  not  to  be  in 
conflict  with  any  constitutional  provisions  relating  to 
imequal  taxation. 

Speaking  of  the  discretion  of  a  legislature  in  laying 
this  tax,  Bradley,  J.,  in  a  case  cited  above,  said:  "It 
has  no  limitation  but  the  discretion  of  the  taxing 
power.  The  value  of  the  franchise  is  not  measured 
like  that  of  property,  but  may  be  ten  thousand  or  ten 
hundred  thousand  dollars  as  the  legislature  may  choose. 
Or,  without  any  valuation  of  the  franchise  at  all,  the 
tax  may  be  arbitrarily  laid."  ^^ 

Some  peculiar  doctrines  relative  to  the  taxation  of 
franchises  exist  in  New  York.  It  has  been  the  gen- 
eral custom  to  assess  the  franchise  of  corporations  in 
connection  with  their  capital  stock  as  personal  prop- 
erty, but  a  case  handed  do\\Ti  in  1891  declared  that 
franchises  of  coi'porations  were  not  taxable,  for  the 
reason  that  they  are  regarded  as  property.^^  But  fran- 
chise has  been  defined  and  limited  to  the  right  or  privi- 

45.  California  v.  Central  Pac.  Ry.  Co.,  127  U.  S.  1. 

46.  People,  etc.  v.  Coleman,  126  N.  Y.  433. 


TAXATIOSr. 


47 


lege  of  being  a  corporation,  i.  e.,  of  doing  business 
in  a  corporate  capacit}^  and  not  the  privilege,  when 
incorporated,  which  the  company  may  exercise.*^  This 
last  has  been  denominated  a  "  special  franchise  "  and 
as  such  has  been  made  the  subject  of  a  "  special  fran- 
chise tax,"  wliich  w^as  laid  in  1S99  in  that  State.  It 
relates  only  to  a  certain  class  of  franchises  which  are 
within  the  term  quasi-public  corporations,  and  is  an 
attempt  to  secure  to  the  State  some  compensation  for 
the  privileges  granted  by  the  State  to  these  quasi- 
public  corporations.  The  act  does  not  give  the  right 
to  assess  a  corporation  for  the  privilege  of  exercising 
its  right  as  such,  or  for  its  good  will,  or  the  choice 
or  conduct  of  its  business.  Tliis  special  franchise  ap- 
proximates closely  to  a  secondary  franchise,  which, 
like  the  original  franchise,  has  not  heretofore  been 
taxable  in  j^ew  York.  The  methods  of  valuation  of 
this  special  franchise  have  not,  as  yet,  received  the 
sanction  of  the  courts,  and  hence  any  statement  of 
them  seems  unwarranted. 

§  32.  State  may  exempt. — .  It  has  been  stated  that 
the  power  to  tax  is  a  mere  incident  to  government, 
and  as  such  may  be  parted  with  by  the  State.  So,  in 
the  absence  of  constitutional  restraint,  it  is  now  set- 
tled that  the  legislature  of  a  State  may  exempt  the 
property  of  corporations  from  taxation,  or  definitely 
fix  the  rate  of  taxation,  and  this  for  a  limited  period  or 
in  perpetuity.'*^ 

The  reason  for  this  is  found  in  the  public  policy  of 
encouraging  corporate  enterprises. 

It  is  further  settled  law  that  Avhen  a  State  has  made 
any  express  stipulations  respecting  the  rate  of  taxation, 
whether  a  compromise  or  a  commutation,  such  a  stipu- 

47.  Home  Ins.  Co.  v.  N.  Y.,  134  U.  S.  594,  affg.  92  N.  Y.  328. 

48.  Dodge  v.  Woolsey,  18  How.   (59  U.  S.)   331. 


4S       SUMMAEY    OF    LAW    OF    PIUVATE    COKPOEATIONS. 

lation  is  construed  as  a  contract  and  ^\^thin  the  consti- 
tutional prohibition.^^ 

Such  grants  aro  strictly  construed,  however,  and 
must  appear  expressly,  as  they  cannot  be  raised  by 
implication.  "Where  the  State  has  exempted  certain 
property  of  coi-porations  from  taxation,  and  the  ex- 
emption is  a  mere  gratuity  on  the  part  of  the  State, 
such  exemption  is  not  a  contract,  but  is  subject  to 
modification  and  repeal  in  like  manner  as  other 
legislation.^*^ 

If  the  exemption  have  been  made  at  a  time  when  no 
reservation  clause  existed,  it  then  is  regarded  as  a  con- 
tract, and  cannot  be  repealed  or  altered. ^^ 

§  33.  Taxation  of  shares  of  stock — Two  theories  seem 
to  exist  as  to  the  taxation  of  shares  of  stock.  The 
one,  that  a  State  has  power  over  all  property,  fixed  or 
movable,  which  has  an  actual  existence  within  the  State, 
and  the  other,  that  movable  property  follows  the 
owner. 

The  question  has  arisen  directly  many  times,  whether 
a  State  has  the  right  to  lay  a  tax  upon  the  shares  of 
stock  of  a  corporation  of  its  creation,  even  though  those 
shares  be  in  the  hands  of  parties  who  reside  outside  the 
State. 

"  Individual  shareholders,  if  taxed  on  their  shares, 
are  to  be  taxed  where  they  respectively  reside,  though 
they  may  he  and  sometimes  are  taxed  at  the  place  where 
the  corporate  business  is  carried  on."  ^^ 

"  The  shares  of  stock  represent  the  property  of  the 
corporation  —  that  in  which  the  capital  stock  is  invested. 
The  owner  is  not  the  omier  to  a  dividend,   but  he  is 


49.  State  v.  Georgia  Ry.  Co.,  54  Ga.  423;  Union  Bank,  etc.  v. 
State,  9  Yerg.   (Tenn.)   490;  Farrington  v.  Tenn.,  95  U.  S.  679. 

50.  Tucker  v.  Ferguson.  22  Wall.    (SO  U.  S.)    527;   West  Wis- 
consin Rv.  Co.  V.  Board  of  Supervisors.  93  U.  S.  595. 

51.  University  v.  People,  99  U.  S.  309. 

52.  C'oolcy  on  Taxation,  p.  274. 


TAXATION.  49 

owner  of  a  proportionate  share  of  the  property,  and 
therefore  the  law  which  created  the  shares  may  sepa- 
rate them  from  the  person  of  their  o^\^ler  for  the  pur- 
pose of  taxation,  and  give  them  a  situs  of  their  own."  ^^ 

"  The  coi-porate  home  is  in  this  State.  Tlie  corpo- 
ration is  subject  to  the  exclusive  legislation  of  the  State, 
and  its  members  are  subject  to  the  legal  enactment  of 
the  legislature  affecting  the  corporation.  If  the  share- 
holders are  not  relieved  from  other  legislation  af- 
fecting the  corporation  or  its  members,  why  should  they 
be  relieved  from  taxation  ?  "  ^^ 

These  arguments  are  in  favor  of  the  theory  that  the 
State  may  lay  a  tax  upon  the  shares  of  stock  of  a  cor- 
poration created  by  it.  '^o  one  doubts  that  if  the  cor- 
poration be  created  with  such  a  clause  in  its  charter, 
the  shareholders,  being  with  notice,  take  the  shares 
subject  to  all  the  conditions.  But  one  may  well  doubt 
the  advisability  and  correctness,  though  not  the  con- 
stitutionality,^ of  such  a  statute  laying  the  tax  after 
the  corporation  has  been  created  and  the  shares  dis- 
tributed, for  the  reason  that  it  is  the  worst  kind  of 
double  taxation,^^  and  in  direct  opposition  to  the  long- 
established  rule  that  personal  property  follows  the 
owner,  and  is  taxable  in  the  place  where  he  resides.^^ 
The  tax  laws  of  one  State  are  entirely  independent  of 
any  other,  and  a  State  may  tax  any  property  it  finds 
within  its  borders,  whether  real  or  personal,  and  this, 
even  though  the  same  property  have  paid  a  tax  in  an- 
other State.^^ 

The  "  capital  stock "  of  a  corporation  is  the  basis 

53.  Tappan  v.  Merchants'  Bank,  19  Wall.    (87  U.  S.)   490. 

54.  St.  Albans  v.  Car  Co..  57  Vt.  68. 

55.  Nashville,  etc..  Co.  v.  Nashville,  8  Lea  (Tenn.)  406;  Far- 
rinprton  v.  Tenn.,  95  U.  S.  679. 

56.  Gillespie  v.  Gaston.  67  Tex.  599;  Republic,  etc.,  Co.  v. 
Pollak,  75  111.  292;  Middlesex,  etc.,  Ev-  Co.  v.  Charlestown,  8 
Allen  (Mass.),  330;  U.  S.  Express  Co.  v'  Ellvson,  28  Iowa,  370. 

57.  Idem. 

58.  City,  etc.  v.  Fry,  63  Cal.  470. 

4 


50       SUMMAKY    OF    LAW    OF    PRIVATE    COKPORATIOXS. 

of  the  corporate  business,  belongs  to  the  coq^oration 
and  to  no  one  else.  Shares  of  stock  are  exclusively 
the  property  of  the  stockholders.  This  distinction  is 
well  recognized,  and  a  tax  laid  on  the  capital  stock  is 
not  a  tax  upon  the  shares  of  stock  and  vice  versa. 

Some  difficulty  arose  at  first,  over  the  fact  that 
shares  of  stock  were  nothing  more  than  choses  in  ac- 
tion, but  they  have  been  very  generally  designated 
property  for  the  purposes  of  taxation,  even  when  not  so 
named  in  the  statutes. 

That  coi^Dorations  pay  a  fair  share  of  taxes  will  be 
readily  recognized  in  the  following  illustration.  A,  an. 
individual,  o^^tis  $100,000  of  real  property.  He  pays 
one  tax  thereon  and  only  one.  The  B  Company  has  a 
capital  stock  of  $100,000  invested  in  real  and  personal 
property.  The  company  pays  a  franchise  tax  based  on 
its  capital  stock,  it  also  pays  the  usual  local  tax  on  its 
property,  and  the  shares  of  stock  in  the  hands  of  the 
shareholder  are  subject  also  to  a  tax,  as  on  personal 
property.  It  seems,  too,  that  a  State  may  compel  a 
tax  upon  these  same  shares  from  the  company. 

Dissolution. 

§  34.  According  to  the  older  text-writers^^  there  are 
four  ways  of  dissolution: 

(1)  By  act  of  legislature. 

(2)  Death  of  all  its  members. 

(3)  Forfeiture  of  the  charter. 

(4)  Surrender  of  the  charter. 

The  second  has  no  value  in  stock  corporations,  for 
the  reason  that  upon  the  death  of  all  the  members  their 
personal  representatives  would  immediately  take  their 
places  as  stockholders,  and  the  corporation  still  remain 
a  going  concern. 

59.  2  Kyd,  447;  1  Blackstone  Com.  485;  2  Kent  (1st  ed.),  245. 


DISSOLUTION.  51 

§  35,  By  act  of  the  legislature —  A  charter  may  be 
repealed  for  misuser  and  nonuser,  or  for  any  other 
good  and  sufficient  reason,  provided  there  be  reserved 
to  the  State  the  power  to  repeal.'^'^  If  this  be  not  the 
case  then  the  Dartmouth  College  imle  obtains  in  all 
its  force,  and  no  action  can  be  taken  by  the  legislature. 
The  legislature  is  the  judge  of  the  reasonableness  of 
the  act,  and  the  courts  have  uniformly  sustained  their 
right  so  to  do.^^ 

§  36.  Forfeiture  of  charter —  Courts  are  generally  re- 
luctant to  enforce  forfeiture  of  charters  on  the  gen- 
eral ground  of  public  policy,  and  this  is  especially  true 
in  the  case  of  quasi-public  corporations.  But  forfeit- 
ure may  be  had  by  the  courts  for  misuser  or  nonuser, 
as  these  matters  affect  the  rights  and  interests  of  the 
public.^^  "  The  public  must  have  an  interest  in  the 
act  done  or  omitted  to  be  done.  If  it  is  confined  ex- 
clusively to  the  corporation,  and  in  nowise  affects  the 
community,  it  should  not  be  considered  as  of  those  con- 
ditions upon  which  the  grant  is  made."  ^^ 

This  question  cannot  be  raised,  however,  except  in 
a  direct  proceeding  by  the  State,  the  reason  being  that 
it  is  the  State's  laws  which  are  violated.  To  allow 
the  question  to  be  raised  by  the  public  directly  or  in 
collateral  proceedings  is  to  run  counter  to  the  principle 
of  public  policy  and  confuse  rights.^"*  But  the  State 
may  make,  and  usually  does  make,  provision  whereby 
the  public  may  proceed  through  the  attorney-general 
or  other  officer,  upon  good  cause  being  shown. 

The  certificate  granted  to  a  corporation  by  the  sec- 

60.  McLaren  v.  Pennington,  1  Paige  (N.  Y.),  102.  See  als,> 
Repeal,  Alteration,  etc.,  ante,  p.  33. 

61.  Erie,  etc.,  Ry.  Co.  v.  Casey,  26  Pa.  St.  287. 

62.  Terret  v.  Taylor.  9  Cranch  (13  U.  S.),  43;  Mumma  v. 
Potomac  Co.,  8  Pet.    (33  U.  S.)   281. 

63.  Harris  v.  Miss.,  etc.,  Ry.  Co.,  51  Miss.  602;  State  v.  K  R. 
Sugar,  etc.,  Co.,  121  N.  Y.  58*2. 

64.  Heard  v.  Talbot.  7  Gray  (Mass.),  113;  Day  v-  Ogdens- 
burgh  Rv.  Co..  107  X.  Y.  129. 


52       SUMMAliV    or    I.AW    OF    PRIVATE    CORPORATIONS. 

retary  of  state,  as  provided  by  statute,  is  conclusive  evi- 
dence of  its  rights  to  be  a  corporation.  The  right  to 
lilo  an  information  in  the  nature  of  quo  warranto,  or 
to  institute  any  form  of  proceeding  to  arrest  the  al- 
leged usurj^ation  of  the  franchise  of  a  corporation,  does 
not  belong  to  the  indi\4dual  citizen,  but  resides  in  the 
State,  and  in  the  absence  of  statute,  in  the  discretion 
of  the  attorney-general.^ 

§  ,37.  Grounds  of —  As  to  the  grounds  of  forfeiture, 
so  long  as  the  act  done  or  omitted  be  of  interest  to  the 
public,  any  violation  of  conditions  named  in  the  charter, 
or  of  those  named  in  the  governing  statute  under  which 
the  corporation  was  formed,  or  those  substantial  condi- 
tions named  in  the  governing  statutes  under  which  the 
corj)oration  acts  operate  per  se  as  such  a  misuser  as  will 
warrant  judicial  forfeiture.^^  Such  violations  may  be 
the  nonperfonnance  of  conditions  subsequent  annexed 
to  the  grant  or  charter;  misuser  generally,  wdien  it 
contravenes  the  charter  or  general  laws;  nonuser  or 
the  abandonment  of  its  franchise;  failure  to  make 
reports  as  required  by  statute  and  joining  a  "trust"  to 
stifle  competition,  have  all  been  declared  by  the  courts 
as  warranting  an  action  to  forfeit.  Statute  may,  and 
usually  does,  prescribe  specific  penalties  for  violation? 
of  the  prescribed  statutory  requirements  or  for  mal- 
feasance or  misfeasance  by  its  officers  and  directors, 
but  it  is  doubtful  if  such  penalizing  statutes  \vi\\  con- 
stitute ground  for  forfeiture,  they  being  more  in  the 
nature  of  remedies  to  the  creditors  and  stockholders 
than  punishment  to  the  coqwration.*'^ 

As  a  general  rule  the  statute  of  limitations  will  not 
run  against  the  State,  nor  can  laches  be  imputed  to 
it.  In  England,  Lord  Mansfield  stated  that  ''  no  length 
of  usurpation  shall  affect  the  crown,"  but  in  the  United 

65.  Rice  v.  Xational  Bank,  etc.,  126  Mass.  300. 

66.  State  v.  Pawtuxct  Co.,  8  R.  I.  182. 

67.  See  on  this  subject  5  Thompson,  §  6641. 


DISSOLUTION.  53 

States  the  rule  seems  to  be  that  where  private  rights 
have  been  acquired  on  the  faith  of  corporate  existence, 
and  a  vacation  of  the  franchise  would  lead  to  injustice 
and  confusion,  that  legislative  waiver  of  a  forfeiture, 
by  acts  of  recognition,  will  cure  defects  in  the  corpo- 
ration.^^ The  State  may  waive  a  forfeiture  by  express 
legislation.^^ 

§  38.  Surrender  of  the  charter. —  The  State  cannot 
force  a  charter  on  a  group  of  individuals,  nor  can  it 
force  a  body  of  shareholders  to  continue  a  corporation 
as  a  "  going  concern  "  if  they  do  not  desire  so  to  con- 
tinue, conditions  being  such  that  the  business  cannot  be 
conducted  except  at  a  loss.  This  would  be  against  pub- 
lic policy,  it  being  the  duty  of  the  State  to  conserve 
rather  than  destroy  property.  This  statement  is  true 
only  of  ordinary  business  or  trading  corporations.  In 
the  case  of  quasi-public  corporations,  the  duty  owing  to 
the  State  and  public  generally  is  such  as  will  give  the 
State  the  right  to  compel  the  corporation  to  perform  its 
duties  and  powers  under  penalty  of  forfeiture.'*' 

The  corporation  having  decided  to  abandon  its  pow- 
ers and  franchise  may  surrender  them  to  the  State.  But 
as  in  the  creation  of  a  corporation  acceptance  of  the 
privilege  or  franchise  by  the  incorporators  is  necessary, 
so  in  a  surrender  of  the  same  the  consent  of  the  State 
is  necessary,  otherwise  the  corporation  remains  in  exist- 
ence,'^^ and  this  though  it  be  insolvent,'^^  have  assigned 
its  property,'^^  have  failed  to  elect  officers,^'*  or  have 
abandoned  its  franchise  and  powers  entirely. 

68.  State  v.  Turnpike  Co..  15  N.  H.  162;  Kanawha  Coal  Co. 
V.  Kanawha  Co.,  7  Blatchf.    (U.  S.  C.)   391. 

69.  Davis  v.  Gray,  1(5  Wall.  (83  U.  S.)  203;  People  v.  Man- 
hattan Co.,  9  Wend.    (N.  Y.)   351. 

70.  People  v.  ?sL  Y.  C,  etc.,  Ry.  Co..  28  Hun   (X.  Y.),  543. 

71.  Boston  Glass  Co.  v.  Langdon,  24  Pick.   (Mass.)   49. 

72.  2  Kent   (1st  ed.),  249. 

73.  Wyeth  Co.  v.  James  Co.,  15  Utah.  110. 

74.  Packard  v.  Old  Colony  Ry.  Co.,  108  Mass.  92. 


54       SUMMARY    OF    LAW    OF    TKIVATE    CORrORATIONS. 


In  States  where  statutes  provide  for  voluntary  dis- 
solution, as  in  Xew  York  and  Massachusetts,  the  statute 
must  be  complied  with,  which  being  shown,  a  judgment 
will  issue.'** 

§  3t).  Expiration  of  charter. —  Even  as  a  contract,  the 
terms  of  which  have  been  fulfilled,  becomes  extinct,  so  a 
corporation  having  reached  the  limit  of  the  period  pre- 
scribed in  its  charter  for  its  corporate  life  becomes  ex- 
tinct, and  this  without  any  direct  action  on  the  part  of 
the  State  or  corj^oration.'^  In  other  words,  an  ipso  facto 
dissolution  takes  place.  When  such  a  dissolution  taikes 
place,  no  powers  created  by  the  charter  or  governing 
statute  can  thereafter  be  exercised,  unless  the  statute 
continue  them  for  the  purpose  of  winding  up  its  affairs. 
It  has  already  been  shown  that  neither  insolvency  nor 
assignment  for  benefit  of  creditors,  nor  failure  to  elect 
officers  will  effect  an  ipso  facto  dissolution.  Nor  will 
the  centering  of  all  the  stock  of  a  corporation  in  one 
man  work  an  ipso  facto  dissolution,  for  it  is  still  the 
property  of  the  corporation.^'  Neither  will  a  sale  of  all 
its  property  destroy  the  corporation.'* 

In  some  instances  charters  have  been  granted  which 
embrace  terms  of  forfeiture  upon  failure  to  comply  with 
conditions  named.  Whether  the  forfeiture  will  be  self- 
executory  or  not  will  depend  upon  the  language  em- 
ployed by  the  legislature.  The  words  "  under  forfeiture 
of  the  privileges  of  said  act  in  future  "  "^  were  declared 
to  be  by  no  means  self-executing.  The  words  "  or  this 
act  and  all  rights  and  privileges  granted  hereby  shall  be 
null  and  void  "  were  given  the  meaning  "  voidable,"  '^ 

75.  Herring  v.  N.  Y.,  etc.,  Ry.  Co.,  10.5  N.  Y.  340. 

76.  People  v.  Anderson,  etc.,  Co.,  76  Cal.   190;  Sturges  v.  Van- 
(lerbilt,  73  N.  Y.  384. 

77.  Harrington  A'.  Connor.  .51  Nebr.  214. 

78.  Reichwald  v.  Com.  Hotel  Co.,  lOfi  111.  439. 

79.  State  v.  Turnpike  Co.,  15  N.  H.  162. 

80.  \.  Y.,  etc..  Bridge  Co.  v.  Smith,  148  N.  Y.  540,  citing 
Ewell  V.  Daggs,  108  U.  S.  143. 


DISSOLUTION.  55 

while  "  its  corporate  existence  and  powers  shall  cease  "  *^ 
and  "  this  act  and  all  its  powers,  rights  and  franchises 
herein  and  hereby  granted  shall  be  deemed  forfeited  and 
terminated  "  *~  were  deemed  self -executing. 

§  40.  Effect  of  dissolution —  Under  the  common  law 
the  effect  of  dissolution  is  to  put  an  end  to  its  existence 
for  all  purposes  and  destroy  all  its  faculties.  Thereafter 
it  can  neither  make  contracts  nor  take  them,  nor  can  it 
sue  or  be  sued ;  all  debts  to  or  from  it  are  extinguished, 
and  all  actions  by  or  against  it  abate.^^  The  harshness 
of  this  rule  has  been  offset  by  equity  and  statute,  so  that 
a  better  rule  for  these  modern  days  is  that  while  con- 
tracts cannot  be  made  or  taken  by  the  corporation  its 
property  remains  in  the  hands  of  its  trustees  and  cred- 
itors, and  the  stockholders  have  their  rights  protected. 
Actions  remain  but  the  remedy  is  changed.  A  court  of 
equity  will  take  the  property  and  use  it  as  a  trust  fund 
for  the  benefit  of  the  creditors  and  stockholders,  through 
receivers  or  trustees,  wdiile  in  most  of  the  States  statutes 
are  in  force  not  only  continuing  the  corporation  as  such 
for  a  period  of  time  to  wind  up  its  affairs,  but  abro- 
gating the  common-law  rule  and  providing  for  the  sur- 
vival of  the  debts  and  the  continuation  of  actions.  The 
obligations  of  contracts  survive,  except  such  as  are  in- 
capable of  specific  performance,  and  the  creditor  may  en- 
force his  claims  against  the  property  of  the  corjDoration 
which  has  not  passed  into  the  hands  of  bona  fide  pur- 
chasers.^'* Executory  contracts  cannot  be  carried  out, 
of  course,  but  modern  English  rules  have  granted  com- 
pensation therefor  by  way  of  damages  for  the  breach  of 
the  contract,^^  but  no  cases  bearing  directly  upon  this 

81.  Matter  of  B.  W.  &  N.  Rt.  Co..  72  N.  Y.  245. 

82.  Brooklyn,  etc..  Co.  v.  Brooklj-n,  78  N".  Y.  524. 

83.  5  Thompson,  §  6718,  and  ca?es  cited. 

84.  Mumma  v.  Potomac  Co.,  8  Pet.   (33  U.  S.)   281. 

85.  Inchbald  v.  \Yestern.  etc..  Co.,  17  C.  B.  (N.  S.)  133;  Re 
Wallshire  Iron  Co.,  L.  R.,  3  Ch.  443. 


56       SUMMAKY    OF    LAW    OF    PIUVATE    CORPORATIONS. 

point  seem  to  have  been  decided  in  the  United  States. 
Statutory  provisions  exist,  however,  applicable  to  this 
subject. 

There  are  decisions  to  the  effect  that  when  forced  into 
dissolution  executory  contracts  become  nugatory,  for  an 
implied  condition  of  their  execution  is  the  de  jure  posi- 
tion of  the  corporation.^^  On  the  other  hand,  when  the 
corporation  is  voluntarily  dissolved,  executory  contracts 
remain  in  force,  for  a  corporation  cannot,  by  its  o\\ti 
act,  relieve  itself  of  contracts.  Equity  will  step  in  and 
hold  its  assets  liable  for  breaches  thereof.^^ 

86.  Griffith  v.  Blackwater,  etc.,  Co.,  46  W.  Va.  56;   People  v. 
Globe,  etc.,  Co.,  91  N.  Y.  174. 

87.  Glass  Co.  v.  Stoehr,  54  Ohio  St.  157 ;  Schluder  v.  Dielman, 
44  La.  Ann.  462. 


CHAPTER  IV. 

POWEES  OF  A  COEPOKATIOIT. 

§  41.  In  general —  The  common-law  idea  of  a  corpo- 
ration and  its  powers  are  concisely  stated  by  Coke  as 
follows : 

"  Now  it  is  to  be  seen  what  things  are  of  the  essence  of 
a  corporation.  1.  Lawful  authority  of  incorporation 
*  *  *  .  The  2nd,  *  *  *  are  persons  to  be  incorpo- 
rated *  *  *.  3.  A  name  by  which  they  are  incorpo- 
rated. 4.  Of  place,  for  without  a  place  no  incorporation 
can  be  made.  5.  By  words  sufficient  in  law,  but  not 
restrained  to  any  certain,  legal,  and  prescript  form  of 
words." 

"  When  a  corporation  is  duly  created  all  other  inci- 
dents are  tacitly  annexed.  And  for  direct  authority  in 
this  point  in  22  E  4,  Grants,  30,  it  is  held  by  Brean,  chief 
justice,  and  Choke  that  corporation  is  sufficient  without 
the  words  to  implead  or  be  impleaded,  etc.,  and  there- 
fore divers  clauses  subsequent  in  the  charters  are  not  of 
necessity,  but  only  declaratory,  and  might  well  have 
been  left  out,  as  1.  By  the  same  to  have  authority, 
ability,  and  capacity  to  purchase,  but  no  clause  is  added 
that  they  may  alien,  etc.,  and  it  need  not,  for  it  is  in- 
cident. 2.  To  sue  and  be  sued,  implead  and  be  im- 
pleaded. 3.  To  have  a  seal,  and  that  is  also  declaratory, 
for  when  they  are  incorporated,  they  may  make  or  use 
what  seal  they  will.  4.  To  restrain  them  from  aliening 
or  devising  but  in  certain  form;  that  is  an  ordinance 
testifying  the  King's  desire,  but  it  is  but  a  precept  and 
does  not  bind  in  law.  5.  That  survivors  shall  be  a  cor- 
poration, that  is  a  good  clause  to  oust  doubts  and 
questions  which  might  arise,  the  number  being  certain. 

[57] 


58       SUMMAKY    OF    LAW    OF    I'KIVATE    COEPOKATIONS. 

*  *  *.  8.  To  make  ordinances ;  that  is  requisite  for 
the  good  order  and  government  of  the  poor,  etc.,  but 
not   to   the  essence  of   the   incorporation.      *      *      *. 

10.  The  license  to  purchase  in  mortmain  is  necessary 

*  *     * "  1 

Blackstone,  writing  150  years  later,  says  that  the 
"  rights,  capacities,  and  incapacities  which  are  neces- 
sarily and  inseparably   incident  to  every  corporation 

*  *  *  are :  ( 1 )  To  have  perpetual  succession  *  *  *. 
(2)  To  sue  and  be  sued,  implead  or  be  impleaded, 
grant  or  receive  by  its  corporate  name,  and  do  all  other 
acts  as  natural  persons  may.  (3)  To  purchase  lands  and 
hold  them  for  the  benefit  of  themselves  and  their  suc- 
cessors, which  two  are  consequential  to  the  former.  (4) 
To  have  a  conunon  seal  *  *  *.  (5)  To  make  by-laws 
or  private  statutes  for  the  better  government  of  the  cor- 
poration   *    *    *." 

Such  are  the  powers  imjDlied  to  every  corporation  ex- 
isting under  the  common  law,  even  to  this  day.  To 
these  may  be  added  such  powers  as  are  granted  expressly 
by  the  charter  or  enabling  statutes,  and  in  addition 
there  are  incidental  powers  necessary  to  exercise  the 
powers  expressly  conferred. 

But  corporations  created  under  legislative  statute  are 
not  created  by  the  common  law,  though  corporations 
created  by  special  act,  with  purposes  of  creation 
only  named,  took  impliedly  these  incidental  or  implied 
powers  of  the  common  law.  The  general  laws,  under 
which  corporations  are  created  to-day,  however,  usually 
name  tlicse  common-law  powers  as  belonging  to  every 
corporation,^  to  which  are  added  such  powers  as  are 
expressly  named  in  the  articles  of  incorporation.  "  We 
take  the  general  doctrine  to  be  in  this  country,  though 
there  may  be  exceptional  cases  and  some  authorities  to 

1.  Coke  on  Litt.,  p.  250a. 

2.  See  for  instance  Laws  of  N.  Y.   1892,  chap.  687;   Laws  of 
N.  J.  1896,  chap.  185. 


POWERS  CONTRACTS.  59 

the  contrary,  that  the  powers  of  corporations  organized 
under  legislative  statutes  are  such  and  such  only  as  those 
statutes  confer.  Conceding  the  rule  applicable  to  all 
statutes,  that  what  is  fairly  implied  is  as  much  granted 
as  what  is  expressed,  it  remains  that  the  charter  of  a 
corporation  is  the  measure  of  its  powers,  and  that  the 
enumeration  of  these  powers  implies  the  exclusion  of  all 
others."  ^ 

"  The  charter  of  a  corporation,  read  in  connection 
with  the  general  laws  applicable  to  it,  is  the  measure  of 
its  powers,  and  a  contract  manifestly  beyond  those  pow- 
ers will  not  sustain  an  action  against  the  corporation. 
But  whatever  under  the  charter  and  general  laws,  reason- 
ably construed,  may  fairly  be  regarded  as  incidental  to 
the  objects  for  which  the  corporation  is  created,  is  not 
to  be  taken  as  prohibited."  ^ 

In  the  construction  of  the  statutes  and  charters  it 
has  already  been  stated  that  where  there  is  no  dispute 
in  which  the  public  is  directly  interested,  a  fair  con- 
struction is  to  be  made  and  not  a  strict  one,  while  if 
the  dispute  be  one  between  the  public  and  the  corpora- 
tion, the  construction  is  to  be  strict  and  in  favor  of  the 
public.^  This  method  of  constniction  admits  of  the  in- 
cidental rights  necessary  to  properly  and  profitably 
carry  out  the  express  provisions  of  the  charter.^ 

To  Make  Contracts. 

§  42.  The  power  to  make  contracts  is  an  implied 
power  based  on  partnership.  In  carrying  on  its  legiti- 
mate business  a  corporation  may  enter  into  any  con- 
tract which  is  reasonably  adapted  to  further  the  pur- 
poses for  which  it  was  incorporated.^ 

3.  Thomas  v.  Railway  Co.,  101  U.  S.  71. 

4.  Green  Bay,  etc.,  Ry.  Co.  y.  Union,  etc.,  Co.,  107  U.  S.  98. 

5.  Chap.  3.  p.  32. 

6.  BrowTi  V.  Winnisimmet  Co.,  11  Allen    (Mass.),  326. 

7.  White  Water,  etc.,  Co.  v.  Vallette,  21  Hoav.  414. 


60       SUMMAKY    OF    LAW    OF    PKIVATE    CORPORATIONS. 

Originally,  a  coqjoration,  lacking  the  power  to  ex- 
press itself  as  an  individual,  could  do  nothing  except 
by  deed  and  seal.  But  the  rule  was  relaxed,  at  first, 
for  convenience  sake,  to  allow  a  corjjoration  to  do  or- 
dinary matters  ^\dtllOut  deed  and  seal.  This  rule  became 
further  relaxed,  and  at  length  it  became  established 
that  while  they  could  not  act  directly,  except  under 
deed,  they  might,  by  mere  vote,  appoint  an  agent  whose 
acts  and  contracts  would  be  binding  on  the  corporation. 

It  was  but  a  step  from  this  iiile  to  the  general  rule 
now  established,  that  whenever  a  corporation  is  actu- 
ally within  the  scope  of  its  legitimate  purjDoses,  all 
parol  contracts  made  by  its  agents  within  the  scope  of 
their  authority  are  express  promises  of  the  corporation, 
and  all  duties  imposed  upon  them  by  law,  and  all  bene^ 
fits  conferred  at  their  request,  raise  implied  promises 
for  the  enforcement  of  which  an  action  will  lie.  And 
so,  given  the  corporate  ability  to  contract  in  some  form, 
in  the  given  circumstances,  the  kind  of  contract  the 
corporation  can  make  is  immaterial.^  It  can  make  con- 
tracts just  as  an  indi\adual  can.  A  seal  is  no  longer 
necessary,  except  in  sucli  contracts  and  deeds  as  require 
the  seal  of  an  individual. 

To  Take,  Hold,  and  Transfer  Real  and  Personal 
Property, 

§  43.  The  power  of  a  corporation  to  take  and  hold 
personal  property  is  unlimited,  unless  restricted  by  its 
charter  or  the  general  laws.  The  statutes  of  mortmain 
do  not  apply  to  personal  property.^  The  power  to 
transfer  or  alienate  is  an  incident  of  the  power  to  pur- 
chase, and  in  the  case  of  personal  property  is  unlimited, 
save  when  to  do  so  would  be  to  either  commit  a  fraud 

8.  Bank  of  Col.  v.  Patterson's  Admr.,  7  Cranch  (11  U.  S.),  299, 
and  cases  therein  cited. 

9.  1  Kyd,  104;  Barry  v.  Merchants'  Ex.  Co.,  1  Sandf.  Ch.  280. 


POWEES 


PEftSOXAL    EIGHTS.  61 


upon  the  creditors  or  the  shareholders.  This  phase  of 
the  subject  will  receive  a  more  complete  statement  in 
another  chapter. ^*^ 

"  Corporations  when  considered  with  reference  to 
their  powers  to  take  and  hold  real  estate  may  be  classi- 
fied as  follows: 

"  First,  those  whose  charter  or  law  of  creation  for- 
bids that  they  should  acquire  and  hold  real  estate.  In 
which  case  a  corporation  cannot  take  or  hold  real  es- 
tate; and  a  deed  or  devise  to  it  passes  no  title. 

"  Secondly,  those  whose  charter  or  law  of  creation 
is  silent  on  the  subject.  In  sucli  case,  as  a  general 
rule,  there  is  no  power  to  acquire  and  hold  such 
property.  But  if  the  objects  for  which  the  coi'poration 
was  formed  cannot  be  accomplished  without  acquiring 
and  holding  the  title  to  real  estate,  the  power  to  do 
so  is  implied. 

''  Thirdly,  those  corporations  whose  charter,  etc.,  au- 
thorizes them  in  some  cases,  or  for  som^e  purposes,  to 
take  and  hold  the  title  to  real  estate.  In  these  cases, 
as  the  cori>oration  may  for  some  purposes  acquire  and 
hold  title,  it  cannot  be  questioned  by  any  party,  except 
the  State,  whether  the  real  estate  has  been  acquired  for 
the  authorized  purposes  or  not. 

"  Fourthly,  those  whose  charter,  etc.,  confer  a  gen- 
eral power  to  acquire  and  hold  real  estate,  such  corpora- 
tions may  take  and  hold  real  estate  as  freely  and  as 
fully  as  natural  persons."  ^^ 

The  common-law  rule  that  corporations  have  an  im- 
plied right  to  purchase  such  real  estate  as  w^as  necessary 
for  the  purposes  of  its  business  arose  at  a  time  when 
business  or  trading  companies  were  little  kno"UTi.^^  The 
corporations  of  that  day  were  either  municipal,  eccle- 

10.  See  chap.  V,  p.  76. 

11.  Haj^vard  v.  Davidson,  41  Ind.  212. 

12.  1   Kyd,  69;   Angell  &  Ames,   §    149. 


62       SUMMARY    OF    LAW    OF    TEIVATE    CORPORATIONS. 

siastical,  or  cliaritable  in  tlicir  nature,  and  the  first  were 
naturally  limited.  The  ecclesiastical  and  charitable 
corporations,  however,  invested  their  money  in  lands, 
for.  indeed,  there  was  little  else,  at  that  time,  which 
would  bring  in  an  income.  So  much  of  the  land  was 
being  accumulated  by  these  cor|3orations  that  the  stat- 
utes of  mortmain  were  passed  in  which  not  only  eccle- 
siastical, but  lay  corporations  as  well,  were  forbidden 
to  purchase  lands.  These  statutes  were  never  enacted 
in  the  United  States,  however,  save  in  the  State  of 
Pennsylvania,^^  and  a  long  line  of  decisions  support  the 
statement  that  corporations  have  ample  power  to  pur- 
chase and  hold  such  real  estate  as  is  necessary  and  rea- 
sonable, in  order  to  carry  out  the  purposes  of  its 
incorporation;^'*  and  this  implied  power  obtains  in  all 
cases  where  the  charter  or  enabling  statutes  are  silent. 

Save  in  those  cases  where  the  charter  confers  gen- 
eral powers  to  purchase,  a  corporation  cannot  lawfully 
purchase  real  estate  for  any  object  inconsistent  with 
the  purposes  for  which  it  was  created.^^ 

Tliis  rule  does  not  prevent  the  acquisition  of  lands 
by  way  of  debts.  Banks  and  other  moneyed  corpora- 
tions frequently  loan  money  on  mortgages,  and  if,  to 
save  loss  to  the  company,  they  find  it  necessary  to  take 
the  property,  such  taking  is  usually  permitted,^^  though 
statute  may  not  permit  a  holding  for  an  indefinite 
period. 

The  question  of  the  amount  and  value  of  the  prop- 

13.  See  3  Binney,  625. 

14.  People  V.  La  Rue,  67  Cal.  526;  Brown  v.  Hogg,  14  111. 
218;  Old  Colony,  etc.,  Ry.  Co.  v.  Evans,  6  Gray  (Mass.),  25; 
Moss  V.  Averill,  10  N.  Y.  449 ;  Reynolds  v.  Commissioners,  .5 
Ohio,  205;   Page  v.  Heineberg,  40  Vt.  81. 

15.  Case  v.  Kelly,  13.3  U.  S.  21;  St.  Peter's,  etc.,  Cong.  v.  Ger- 
main. 104  111.  440;  Sutton  v.  Cole,  3  Pick.  (Mass.)  232;  N.  J.  A. 
R.,  etc.,  Co.  V.  Xewark,  25  N.  J.  L.  315;  Rensselaer  Ry.  Co.  v. 
Davis,  43  N.  Y.  137. 

16.  Silver  Lake  Bank  v.  Xorth,  4  Johns.  Ch.  (N.  Y.)  370; 
National  Bank  v.  Matthews,  98  U.  S.  621 ;  Baird  v.  Bank,  11  Serg. 
&  R.  411. 


POWEES PEOPERTY    EIGHTS.  63 

erty  which  a  corporation  may  hold,  unless  expressly 
limited,  has  received  a  very  liberal  interpretation.  It 
seems  that  the  phrase  "  it  may  lawfully  acquire  and  hold 
any  amount  of  property,  whatever  its  value,  for  ihe 
purposes  of  its  creation,"  ^"^  is  the  proper  expression 
of  a  corporation's  power  in  this  respect.  Under  this 
rule,  if  the  company  sees  a  future  need  of  the  prop- 
erty, or  wishes  to  erect  and  o\\ti  an  office  biiilding,^^ 
or  wants  to  erect  dwellings  for  cmployees,^^  it  may 
do  so. 

Given  power  to  purchase  real  estate  and  the  pur- 
chases made  within  the  rule  above  stated,  the  title 
which  a  corporation  takes  is  that  of  an  estate  in  fee, 
unless,  of  course,  it  be  qualified  by  the  parties  them- 
selves or  the  corporation.^^  And  this  is  true,  even 
though  the  corporate  life  be  limited  to  a  number  of 
years.^^ 

The  power  of  a  corporation  to  take  by  adverse  pos- 
session is  also  established.^^' 

A  corporation  may  also  hold  as  tenant  in  common,^^ 
though  it  cannot  hold  in  joint  tenancy,^"*  nor  can  it 
take  a  beneficial  interest  in  land,  when  it  cannot  hold 
land  in  its  own  name.^ 

The  power  to  take  and  hold  property  in  trust  will 
be  implied,  although  the  authority  to  assume  such  be 
not  conferred  by  express  words,  whenever    the  trust 

17.  Barry  v.  Merchants'  Exchange  Co.,  1  Sandf.  Ch.  (N.  Y.) 
280. 

18.  People  V.  Pullman  Palace  Car  Co.,  175  111.  125. 

19.  Steinway  v.  Steinway,  17  Misc.   (N.  Y.)   43. 

20.  Pa?e  V.  Hineberg,  40  Vt.  81;  Erie,  etc.,  Ry.  Co.  v.  State, 
31  N.  J.  L.  531;  People  v.  Mauran,  5  Denio   (K  Y.),  389. 

21.  Nicoll  V.  N.  Y.  &  E.  Ry.  Co.,  12  Barb.  460;  Yates  v.  Van 
De  Bogert,  56  N.  Y.  526. 

22.  Rehoboth  v.  Carpenter,  23  Pick.  (Mass.)  131;  Humbert 
V.  Trinity  Church.  24  Wend.    (N.  Y.)   587. 

23.  Estell  V.  Univ.  cf  South,  12  Lea  (Tenn.),  476;  De  Witt  v. 
City  of  San  F..  2  Cal.  289. 

24.  Telfair  v.  Howe,  3  Rich.  Eq.  (S.  C.)  235;  Bennett  v.  Hol- 
beck,  2  Saunders,  319. 

25.  Coleman  v.  San  R.  T.  R.  Co.,  49  Cal.  517. 


6-i       SUMMARY    OF    LAW    OF    PKIVATE    COEPOKATIONS. 

is  in  furtherance  of  the  general  objects  of  the  corpo- 
ration,"" though  this  rule  will  not  apply  if  the  purpose 
be  foreign  to  its  institution."^ 

§  44.  The  power  to  take  by  devise. —  By  the  English 
statutes  of  mortmain,  already  noticed,  the  power  of 
a  corporation  to  take  real  estate  by  devdse  was  re- 
strained. In  the  United  States  the  rule  differs,  in  that 
the  general  rule  is  that  in  the  absence  of  express  statu- 
tory restraint  the  common-law  rule  applies,  and  cor- 
porations may  take  by  devise,  subject  to  the  qualification 
that  tlie  property  devised  must  be  used  for  the  pur- 
poses for  which  the  corporation  was  instituted,  on  the 
ground  that  the  word  "  purchase "  includes  the  ac- 
quisition of  land  by  devise.^^  Some  of  the  States,  nota- 
bly Xew  York,  have  enacted  in  their  statutes  of  wills 
that  corporations  may  not  take  by  devise.  Under  such 
statutes,  devises  of  property  within  the  State,  to  either 
domestic  or  foreign  corporations,  would  be  void,  the 
statute  limiting  the  individual  in  the  disposition  of  his 
property.  A  devise  of  property  situated  outside  the 
State  by  a  citizen  of  another  State  to  a  New  York  cor- 
poration, when  only  the  statute  of  wills  contained  the 
restraining  clause,  was  held  good.^^  The  question  seems 
to  depend  upon  whether  the  charter  forbids  the  tak- 
ing or  the  restraint  is  found  in  the  statute  of  wills. 
If  the  former  be  the  case  the  charter  is  the  measure 
of  the  powers  of  the  corporation,  and  will  follow  the 
coii^oration  wherever  it  go;  but  if  the  statute  of  wills 
forbid  tlicre  seems  to  be  no   reason  why  the  corpo- 

26.  Vidal  v.  Girard,  2  How.  (43  U.  S.)  121;  Phillips  Acad. 
V.  King,  12  Mass.  546. 

27.  Jackson  v.  Hartwell,  8  Johns.  (X.  Y.)  422;  Case  v.  Kelly, 
133  U.  S.  21. 

28.  Matter  of  the  Estate  of  McGraw,  111  N.  Y.  66;  Rat- 
cliff  e's  Case,  1  Strange,  267;  McCartee  v.  Orphan  Asylum,  9 
Cow.   (N.  Y.)   437. 

29.  Crum  v.  Bliss,  47  Conn.  592;  White  v.  Howard,  38  Conn. 
342.     But  see  White  v.  Howard,  46  N.  Y.  144. 


I 


POV\^ERS  PROPERTY    RIGHTS.  65 

ration  may  not  take  property  located  outside  the  State, 
devised  by  a  testator,  whose  domicile  was  in  a  State 
where  the  statute  did  not  apply. ^° 

§  45.  Ultra  vires  conveyances. —  The  question  of  hold- 
ing  becomes  important  only  in  the  matter  of  ultra  vires 
takings  by  the  corporation,  for  if  the  takings  be  within 
the  sphere  of  corporate  necessity  or  reasonableness,  the 
corporation  may  hold  even  as  an  individual  may 
hold.  In  the  case  of  an  individual  citizen  there  is 
no  distinction  to  be  made  between  his  power  to  take 
and  hold  against  the  State  itself.  But  it  has  been 
stated,  and  is  undoubtedly  the  rule,  that  an  alien 
may  take  under  our  laws,  and  hold  as  against  every- 
body except  the  State.  A  corporation  taking  ultra 
vires  is  in  a  similar  position.  To  allow  third  par- 
ties to  question  the  holdings  of  a  corporation  would 
be  to  throw  estates  into  the  utmost  confusion 
and  lead  to  infinite  inconveniences.  The  matter  is 
one  between  the  government  and  the  corporation  and 
is  no  concern  of  third  parties.^^  The  general  rule  may 
thus  follow:  where  a  corporation,  by  the  law  of  its 
creation,  is  authorized,  in  some  cases,  or  for  some  pur- 
poses, or  to  a  limited  extent,  to  take  and  hold  real  es- 
tate, and  real  estate  has  been  acquired  in  excess  of  the 
capacity  of  the  corporation  to  take  and  hold,  such  taking 
and  holding  cannot  be  made  a  question  by  any  party, 
except  the  State.^^  This  rule  seems  established  with 
striking  unanimity,  let  alone  the  weight  of  authority, 
and  applies  not  alone  to  corporations  de  jure,  but  also 
to  corporations  de  facto}^ 

30.  Am.  Bible  Soc.  v.  Marshall,  15  Ohio  St.  537;  Christian 
Union  v.  Yount,  101  U.  S.  352. 

31.  Water  Co.  v.  darken,  14  Cal.  543. 

32.  Ibid.;  National  Bank  v.  Matthews,  08  U.  S.  621;  Jones  v. 
Habersham,  107  id.  174;  Alexander  v.  Tolleston  Club,  110  111. 
65;  Russell  v.  Texas,  etc.,  Ry.  Co.,  68  Tex.  646;  Bank  v.  Poitiaux, 
3  Rand.   (Va.)   136. 

33.  East  Norway,  etc.,  Church  v.  Froislie,  35  N.  W.  260. 


66       SUMMAEY    OF    LAW    OF    PBIVATE    CORPOEATIONS. 

Where  the  corporation  has  been  prohibited  by  its 
charter  from  acquiring  real  estate,  the  weight  of  au- 
thority is  in  favor  of  declaring  a  deed  thereof  to  be 
absolutely  void.^"*  It  is  believed,  however,  that  if  the 
coi-poration  be  in  actual  possession  of  the  property  that 
the  general  rule  will  obtain,  and  no  party  save  the  State 
will  be  allowed  to  object. 

The  general  rule  above  stated  obtains  in  Xew  York, 
except  in  the  case  of  a  corporation  receiving  property 
by  will  or  devise.  In  that  case  it  seems  that  a  third 
party  may  question  and  even  defeat  the  title  to  the 
property  in  the  hands  of  the  corporation.^^ 

§  46.  The  power  to  alienate — As  stated  above,  the 
power  to  alienate  property  is  an  incident  to  the  power 
to  purchase,  the  jus  disponendi  being  an  incident  to 
ownership.  But  the  power  to  sell  or  assign  must  be 
limited  to  transactions  made  under  authority  and  in 
good  faith,  otherwise  both  creditors  and  stockholders 
may  claim  fraud,  and  in  proper  cases  set  aside  the 
transactions  in  a  court  of  equity. 

§  47.  The  power  to  lease —  "  Subject  to  the  principle 
that  a  corporation  having  public  duties  to  perform  can- 
not disable  itself  from  performing  those  duties  -with- 
out consent  of  the  State,  a  corporation,  authorized  by 
its  charter  to  hold  real  property,  may  lease  it  to  be 
used  for  a  business  which  the  corporation  itself  could 
not  lawfully  carry  on.  '  The  right  to  hold  such  prop- 
erty includes  the  right  to  lease  it  so  as  to  make  it  pro- 
duce income.  It  would  be  too  strict  a  construction  of 
the  statute  to  decide  that  a  corporation  which  may  lease 
real  estate  for  profit  can  lease  it  only  to  be  used  in 
those  kinds  of  wdiich  it  is  authorized  by  its  charter  to 
carry  on.'     Even  where  such  a  lease  is  ultra  vires,  pro- 

34.  St.  Peter's,  etc.,  Church  v.  Germain,  104  111.  440;  Cromie 
V.  Louisville,  etc.,  Society,  3  Bush  (Ky.),  365.  See  contra,  Mal- 
lett  V.  Simpson,  94  N.  C.  37. 

35.  Estate  of  John  C.  McGraw,  HI  N.  Y.  66. 


POWERS TO    BOEEOW   MONEY.  67 

vided  that  it  is  not  so  in  the  sense  of  being  malum  in  se, 
it  will  be  enforced  in  so  far  as  it  has  been  executed  on 
one  side,  on  the  principle  *  *  *  (of  estoppel),  so  that 
where  the  lessee  has  taken  possession,  the  corporation 
may  recover  rent  earned  under  the  lease.  The  directors 
of  a  corporation  which  has  been  unsuccessfully  carrying 
on  the  business  for  which  it  was  organized  may,  with  the 
consent  of  the  majority  of  the  stockholders,  validly 
lease  the  plant  of  the  corporation  for  ten  years  with 
the  privilege  of  purchase,  to  another  corporation  carry- 
ing on  the  same  business,  even  though  a  minority  of  the 
shareholders  object  thereto."  ^® 

The  Powee  to  Boreow  Money. 

§  48.  This  power  is  implied  to  a  corporation  from 
the  power  to  make  contracts  and  carry  on  its  business. 
These  powers  imply  the  right  to  incur  indebtedness  and 
it  follows  naturally  that  a  corporation  may  choose  such 
means  as  are  convenient  and  expedient  to  liquidate  the 
indebtedness  so  created,  so  long  as  those  means  be 
within  the  scope  of  the  corporate  objects.  The  power 
to  borrow  money  is  one  of  these  means.^^  This  power 
is  unlimited  at  common  law,^  though  many  States  limit 
the  amount  of  indebtedness  to  be  contracted  by  a 
corporation. 

The  Powee  to  Moetgage  Its  Property. 

§  49.  Unless  the  legislature  has  forbidden  a  corpo- 
ration to  mortgage  its  property  by  an  express  provision 
in  its  charter,  or  by  placing  it  under  such  a  duty  to  the 
public  that  a  foreclosure  of  the  mortgage  would  prevent 
its  fulfilling  these  duties,  its  right  to  mortgage  may  al- 

36.  7  Thompson,  §  8365,  and  cases  cited.     But  see  article  14 
Harvard  Law  Rev.  332. 

37.  Barry  v.  Merchants'  Exchg.  Co.,  1  Sandf.  Ch.  280;  Wright 
V.  Hughes,  119  Tnd.  324. 

38.  Barry  v.  Merchants'  Exchg.  Co.,  1  Sandf.  Ch.  280. 


68       SUMMAKY    OF    LAW    OF    PIMVATE    COKPOKATIONS. 

ways  be  implied  where  it  has  authority  to  borrow  or  in- 
cur indebtedness,  and  to  alien  the  subject-matter  of  the 
mortgage/'^  and  the  mortgage  may  include  the  franchise, 
except  in  the  case  of  public  or  quasi-public  corpora- 
tions, where  the  consent  of  the  State  is  necessary,  on 
the  ground  that  an  engagement  of  this  kind  might  oper- 
ate to  prevent  the  corporation  from  performing  these 
public  duties/" 

The  Pow^er  to  Issue,  Accept,  or  Indorse  Negotiable 

Paper. 

§  50.  In  England,  corporations  have  not  the  power 
to  issue  bills  and  notes,  unless  the  business  is  such  that 
it  cannot  be  carried  on  without  such  issue;  and  the  di- 
rectors have  no  power  to  draw,  accept,  or  indorse  them 
in  the  name  and  on  behalf  of  the  company.  Xor  can  the 
power  to  do  so  be  implied  from  the  right  to  incur  debts, 
nor  is  it  coextensive  with  the  power  to  engage  in  busi- 
ness or  to  borrow  money.'*^ 

In  the  United  States,  however,  the  rule  is  different, 
and  the  authorities  are  practically  unanimous  in  support 
of  the  rule  that  every  private  corporation,  unless  re- 
strained by  the  provisions  of  its  charter,  has  the  power, 
while  acting  within  the  legitimate  purposes  of  its  in- 
corporation, to  make  promissory  notes,  to  draw  and  ac- 
cept bills  of  exchange,  and  to  assume  the  obligations  of 
an  indorser.  This  jDOwer  is  based  upon  and  is  coexten- 
sive with  the  power  to  make  contracts  and  incur  debts.*^ 

But  a  corporation  has  no  power  to  bind  itself  by  be- 

39.  Jonps  V.  Guaranty  Co.,  101  U.  S.  022;  Fitch  v.  Lewiston, 
etc..  Co..  80  :\rc.  34;  Curti.s  v.  Loavitt.  15  N.  Y.  9. 

40.  Commonwealth  v.  Smith,  10  Allen,  448;  Evans  v.  Boston, 
etc..  Co.,  157  Mass.  37. 

41.  Bateman  v.  Mid- Wales  Ry.  Co.,  L.  R.,  1  C.  P.  499,  and 
cases  cited. 

42.  Orommes  v.  Sullivan.  81  Fed.  45;  Olcott  v.  Tiojra  Rv.  Co., 
27  N.  Y.  540;  Lucas  v.  Pitney,  27  N.  J.  L.  221;  Bradley  v. 
Ballard,  55  111.  413. 


POWEKS NEGOTIABLE    PAPER.  69 

coming  an  acceptor,  maker,  or  indorser  of  accommo- 
dation paper  for  the  benefit  of  other  persons  or  corpo- 
rations, and  this  on  the  ground  that  to  do  so  would  be 
to  risk  the  property  of  its  stockholders  in  channels  for- 
eign to  the  express  purposes  of  the  incorporation.^^ 

The  implied  power  to  issue,  accept,  and  indorse  nego- 
tiable paper  carries  with  it  the  presumption  that  the 
corporation  has  acted  Avithin  its  powers  in  so  doing. 
Accordingly,  an  innocent  purchaser  for  value  of  corpo- 
rate paper,  even  though  it  be  issued,  accepted,  or  in- 
dorsed for  accommodation,  or  be  ultra  vires  the  corpora- 
tion, will  be  protected,  and  may  recover  upon  such 
instruments.'*'* 

Where  the  power  to  issue,  accept,  and  indorse  nego- 
tiable paper  is  expressly  denied  the  corporation  by 
statute  or  charter,  accommodation  paper  so  executed 
will  be  void,  even  in  the  hands  of  a  hona  fide  purchaser 
for  value.'*'' 

"Where  the  corporation  is  thus  expressly  prevented 
from  issuing,  accepting,  and  indorsing,  paper  coming 
to  the  corporation  in  the  usual  transactions  of  business 
may  be  indorsed  by  the  corporation  for  the  purpose  of 
transfer,  but  no  liability  will  attach  thereto.*^ 

Power  to  Act  as  Trustee. 

§  51.  It  was  formerly  held  that  a  corporation  could 
not  hold  lands  to  the  use  of  another.  The  reasons  as- 
signed for  this  rule  were  that  neither  trust  or  confidence 

43.  Tod  V.  Kentuckv  Union  Land  Co.,  57  Fed.  47;  ■\^^ebster  v. 
Howe  Machine  Co..  54  Conn.  394;  Pick  v.  Ellinger.  66  111.  App. 
570;  National  Park  Bank  v.  German,  etc.,  Co..  116  N.  Y.  281. 
fiemblc.  contra,  ^larlin  v.  Niagara,  etc.,  Co.,  122  N.  Y.   165. 

44.  Farmers'  Nat.  Bank  v.  Sutton,  etc.,  Co.,  52  Fed.  101 ;  Monu- 
ment Nat.  Bank  v.  Globe  Works,  101  Mass.  57:  Bissell  v.  ;Mich. 
So.  Ry.  Co.,  22  N.  Y^  289;  Bank  of  Republic  v.  Young,  41  N.  J. 
Eq.  531. 

45.  Root  V.  Godard,  3  McLean  (U.  S.  C.)  102;  Hayden  v. 
Davis,   id.   276. 

46.  N.  Y.  Neg.  Inst.  Law,  §  41. 


70       SUMMAKV    OF    LAW    OF    PHIVATE    COKPOKATIONS. 

could  be  imposed  in  a  corporation  aggregate,  as  the 
courts  could  not  compel  a  corporation  to  execute  a  trust, 
the  corporation  having  no  conscience,  nor  could  it  take 
an  oath,  and  lastly  it  could  not  be  imprisoned  for  a  re- 
fusal to  obey  the  decree  of  the  court. 

But  this  doctrine  has  long  since  been  abandoned,  and 
it  is  now  settled  beyond  dispute  that  public,  quasi-pub- 
lic, and  even  business  corporations  have  the  power  to 
hold  real  or  personal  property  in  trust  for  any  purpose 
that  is  not  foreign  to  the  purposes  of  its  creation,  and 
that  courts  of  equity  will  enforce  the  trusts.^^  Excep- 
tions arise,  however,  and  where  a  corporation  is  ex- 
pressly prohibited  from  taking  land  by  devise  or  other- 
wise, it  cannot  act  as  a  trustee.'*^ 

For  the  ancient  reason  that  a  corporation  could  not 
act  as  trustee,  the  power  to  act  as  executor,  adminis- 
trator, guardian,  etc.,  was  denied  to  the  corporation. 
To-day  a  corporation,  if  authorized  by  its  charter,  and 
not  prohibited  by  statute,  may  act  in  any  of  these  capac- 
ities, to  which  may  be  added  the  power  to  act  as  com- 
mittee of  an  insane  person  or  habitual  drunkard,  and 


The  Power  to  Enter  into  a  Partnership. 

§  52.  The  obvious  and  important  distinctions  between 
a  corporation  and  a  partnership  of  agency  and  liability 
are  the  reasons  for  the  general  rule  that  corporations 
cannot  consolidate  their  funds  with  each  other^*^  or  with 

47.  Jones  v.  Habersham,  107  U.  S.  174;  Farmers'  L.  &  T.  Co. 
V.  Harmony,  etc.,  Co.,  41  N.  Y.  619;  affp.  s.  c,  51  Barb.  33;  Vidal 
V.  Girard,  2  How.  (43  U.  S.)  187;  Phillips  Acad.  v.  King,  12 
Mass.  246. 

48.  Trust  Co.  v.  Lee,  73  111.  142. 

49.  Camden  Safe,  etc..  Co.  v.  Ingham,  40  X.  J.  Eq.  3 ;  Fidelity, 
etc..  Co.  V.  Niven,  5  Houst.  (Del.)  410;  Equitable  Trust  Co.  v. 
Garis.  100  Pa.  St.  544;  Roane  Iron  Co.  v.  Wisconsin  Trust  Co., 
99  Wis.  273. 

50.  N.  Y.,  etc.,  Canal  Co.  v.  Fulton  Bank,  7  Wend.  412. 


POWERS TO    FORM    PAETNEKSHIP.  71 

an  individuaP^  so  as  to  form  a  partnership,  unless,  of 
course,  the  legislature  has  enabled  them  to  do  so. 

It  seems,  however,  that  if  the  partnership  be  one  to 
be  terminated  at  will,  the  corporation  to  bear  the  entire 
burden  as  to  liability  and  the  purposes  to  be  within  the 
corporate  powers,  it  will  be  upheld  by  the  courts.^^  But 
a  corporation  may  not  enter  into  a  "  trust "  whereby  a 
committee  or  a  central  company  operate  the  property 
for  the  common  benefit  so  as  to  stifle  competition.^^ 

A  distinction  must  be  made  between  a  partnership 
and  a  joint  contract,  as  where  two  carrying  companies 
enter  into  a  contract  or  joint  traffic  agreement  for  the 
transportation  of  goods.  "  It  is  clear  on  principle  and 
authority  that  both  defendants  were  competent  to  enter 
into  contract  to  carry  this  oil  from  Panama  to  l^ew 
York.  As  each  was  competent  to  contract  alone,  it 
cannot  be  doubted  that  they  were  competent  to  make 
a  joint  contract  to  do  it.  They  could  even  become  part- 
ners in  the  transportation  business  *  *  *  and  so 
far  as  we  have  discovered,  the  power  of  corporations 
thus  to  become  joint  carriers  has  never  been  denied,  but 
has  frequently  been  recognized."  ^'^ 

The  right  of  a  corporation  or  an  individual  to  recover 
upon  obligations  made  to  them,  while  acting  in  the 
capacity  of  partners,  will  depend  much  upon  the  juris- 
diction. The  weight  of  authority  is  probably  in  favor 
of  allowing  a  recovery,  irrespective  of  their  rights  and 
duties  between  themselves  or  of  the  power  of  the  cor- 
poration to  enter  into  a  partnership,  and  this  on  the 
ground  of  estoppel.^^ 

51.  Whitterton  Mills  v.  Upton,  10  Gray    (Mass.),  582. 

52.  Allen  v.  Woonsocket  Co.,  11  R.  I.  288.  See  also  Catskill 
Bank  v.  Gray,  14  Barb.   (N.  Y.)   471. 

53.  State  v.  X.  R.  Sugar  Ref.  Co.,  121  K  Y.  582. 

54.  Swift  V.  Pac.  Mail  SS.  Co..  106  N.  Y.  206,  and  cases  cited. 
But  see  contra.  Mallory  v.  Hanaur  Oil  Works,  86  Tenn.  598. 

55.  See  Ultra  Vires  Contracts,  post,  chap.  V. 


72     summary  of  law  of  private  corporations. 

Power  to  Acquire  and  Hold  its  Own  Stock. 

§  53.  The  English  doctrine  as  to  this  power  is  settled 
and  rigid.  A  corporation  cannot  acquire  and  hold  its 
OA\Ti  stock,  unless  expressly  authorized  to  do  so  by  its 
charter,  for  the  reason  that  it  would  be  a  fraud  upon  the 
part  of  the  corporation  and  would  tend  to  a  breach  of 
duty  on  the  part  of  the  directors.^^ 

In  the  United  States  two  views  exist,  the  one  (a)  con- 
ceding that  the  power  exists  on  the  ground  that  there  is 
nothing  in  the  nature  of  a  corporation  that  renders  it 
incapable  of  holding  or  dealing  in  its  own  stock,  unless 
prohibited  by  charter  or  statute."  (b)  On  the  other 
hand,  the  weight  of  authority  seems  to  be  in  favor  of 
the  English  rule  on  several  grounds:  (1)  fraud  upon 
creditors,  in  that  it  practically  amounts  to  a  reduction 
of  capital  stock;  (2)  violation  of  contract  with  the 
stockholders  who  do  not  consent ;  and  ( 3 )  a  violation 
of  the  charter,^®  The  power  will  be  denied  in  any  juris- 
diction, if  the  rights  of  creditors  are  involved,  injured, 
or  prejudiced,  and  thie  even  though  there  have  been  good 
faith  in  making  the  purchase.^^ 

In  the  absence  of  express  statutory  prohibition  corpo- 
rations may  acquire  and  hold  their  own  stock  when  it 
is  acquired  (1)  by  gift  or  bequest;^"  (2)  when  taken  in 
payment  of  debts,  the  transaction  being  reasonably  neces- 
sary to  prevent  loss,  as  for  instance,  the  stock  having 
been  taken  as  collateral  for  a  pre-existing  debt  f^  and 

56.  Green's  Briee's  Ultra  Vires   (2d  ed.) ,  p.  94. 

57.  Dupee  v.  Boston,  etc.,  Co.,  114  Mass.  37;  Clapp  v.  Peter- 
son,  104  111.  26. 

58.  Coppin  V.  Greenless  Co.,  38  Ohio  St.  275;  Sutherland  v. 
Olcott.  9")  N.  Y.  03;  Currier  v.  Slate  Co.,  5G  N.  H.  262;  Bank  v. 
Wickersham.  09  Cal.  655. 

59.  Crandall  v.  Lincoln.  52  Conn.  73;  Commercial  Bank  v. 
Burch,  141  111.  519;  Columbian  Bank's  Estate,  147  Pa.  St.  422. 

60.  Rivanna  Nav.  Co.  v.  Dawsons,  3  Gratt.   (Va.)    19. 

61.  See  cases  already  cited. 


POWEES TO    HOLD    STOCK.  73 

(3)  when  taken  as  a  compromise,  on  a  dispute  between 
the  corporation  and  the  stockholder.*^^ 

When  a  corporation  has  competently  purchased  shares 
of  its  own  stock,  it  may  hold  them  unextinguished,  and 
reissue  them,  but  while  holding  them  it  cannot  exercise 
the  privileges  which  pertain  to  an  ordinary  stockholder, 
and  especially  it  cannot  vote  on  them,  for  to  do  this 
would  be  to  usurp,  partially  at  any  rate,  the  power  of 
the  stockholders,  and  to  take  an  advantage  over  them 
which  is  in  violation  of  their  contract.^^ 

Power  to  Acquire  axd  Hold  Stock  iisr  Another 
Corporation. 

§  54.  This  power,  in  absence  of  statutory  permis- 
sion, will  depend  very  much  upon  the  nature  of  the 
corporation,  its  purposes,  and  the  purposes  for  which  the 
stock  is  acquired. 

In  England  the  earlier  authorities  held  that  the  power 
was  lacking,  unless  expressly  given.  This  rule  has  been 
changed,  and  corporations  may  now  purchase  and  hold 
stock  in  another  corporation  unless  expressly  pro- 
hibited.*'^ 

In  the  United  States,  however,  the  opposite  rule  pre- 
vails, save  in  two  States  (Mar^dand  and  Iowa),  and  this 
on  the  ground  that  to  allow  it  would  be  to  allow  a  corpo- 
ration to  engage  in  a  business  foreign  to  its  created  pur- 
poses.^^  This  is  especially  true  where  the  corporations 
have  different  purposes,^^  and  are  subject  to  laws  of  a 
different  character.''^    Indeed,  if  allowed  at  all,  it  must 

63.  The  Phosphate,  etc.,  Co.  v.  Green,  L.  R..  7  C.  P.  43 ;  New 
Albany  v.  Burke,  11  Wall.   (78  U.  S.)   96. 

63.  See  Taylor    (4th  ed.),   §   13G,  and  cases  cited. 

64.  Re  Asiatic  Bankinfr  Co..  L.  R.,  4  Ch.  App.  2.52. 

65.  Franklin  Co.  v.  Lewiston.  etc..  Bank.  68  Me.  43:  Franklin 
Bank  v.  Commercial  Bank,  36  Ohio  St.  3.55;  Central  Ry.  Co.  v. 
Collins,  40  Ga.  582. 

66.  Panlv  v.  Coronado  Beach  Co.,  56  Fed.  428. 

67.  McCiitcheon  v.  Merz  Co.,  37  U.  S.  App.  586. 


74       SUMMAKY    OF    LAW    OF    PEIVATE    COBPOEATIONS. 

be  in  cases  wlicre  the  purposes  are  the  same  and  the 
same  laws  regulate.^ 

It  cannot  be  allowed  for  the  purpose  of  controlling  or 
lessening  or  defeating  competition,  on  the  grounds  of 
public  policy.^^ 

The  power  will  be  implied,  if  not  expressly  given, 
under  certain  conditions  and  circumstances,  however, 
and  in  general  these  would  be  when  the  investment  is 
reasonable  and  within  the  purposes  and  rights  of  the 
corporation.  The  power  to  consolidate  with  another 
corporation  ]'^  the  duty  of  a  corporation  to  keep  its  funds 
invested  to  produce  income  ;^^  the  taking  of  stock  by  way 
of  a  compromise,  when  the  transaction  is  hona  fidef^ 
the  taking  of  stock  as  collateral  for  a  debt  previously 
existing,  in  order  to  prevent  loss  ;^^  and  the  right  of  a 
purely  private  corporation  to  sell  its  property  and  wind 
up  its  business,  and  in  doing  so  to  sell  its  stock  to  any 
purchaser,  individual  or  corporation,'^^  are  all  implied 
unless  expressly  granted,  and  are  within  the  general 
rule  above  expressed. 

There  is  nothing  to  prevent  a  stockholder  of  one  cor- 
poration subscribing  or  purchasing  stock  in  another  cor- 
poration, as  the  stockholder  stands  in  no  fiduciary  re- 
lationship either  to  the  other  shareholders  or  the  cor- 
poration/^ 

Power  to  Make  By-Laws. 

§  55.  "  ITow  I  am  of  opinion  that  though  power  to 
make  laws  is  given  by  special  clause  in  all  corporations, 
yet  it  is  needless,  for  I  hold  it  to  be  included  by  law  in 

68.  Merz  Co.  v.  Capsule  Co.,  67  Fed.  414. 

69.  Elkins  v.  Camden,  etc.,  Ry.  Co..  36  N.  J.  Eq.  5. 

70.  Marbury  v.  Land  Co.,  62  Fed.  335. 

71.  Hodges  V.  Screw  Co.,  1  R.  I,  312. 

72.  Bank  of  Charlotte  v.  National  Bank,  92  U.  S.  122. 

73.  Talmage  v.  Pell,  7  N.  Y.  328. 

74.  Holmes    v.    Holmes,    127    N.    Y.    252.     But    compare    Me- 
Cutchern  v.  Merz  Co.,  71  Fed.  787. 

75.  Green  v.  Hedenberg,   159  111.  489. 


POWERS TO    MAKE   BY-LAWS.  Y5 

the  very  act  of  incorporating,  as  is  also  the  power  to  sue, 
to  purchase,  and  the  like.  For,  as  reason  is  given  to  the 
natural  body  for  the  governing  of  it,  so  the  body  corpo- 
rate must  have  laws  as  a  political  reason  to  govern  it, 
but  those  laws  must  ever  be  subject  to  the  general  laws 
of  the  realm  as  subordinate  to  it.  And  therefore,  though 
there  be  no  proviso  for  that  purpose,  the  law  supplies 
it."  '^ 

76.  Morris  v.  Staps,  Hobart's  Rep.,  p.  21o.     See  also  Ireland 
V.  Globe,  etc.,  Co.,  19  R.  I.  180. 


CHAPTER  V. 

General  Powers  and  Ultra  Vires. 

§  56.  In  general. —  Having  stated  tlie  powers  usually 
implied  to  every  corporation,  as  well  as  those  usually 
denied,  it  remains  to  say  a  few  words  about  the  general 
powers  of  a  corporation.  It  has  been  stated  many  times 
that  corporations  possess  such  common-law  powers  as 
are  implied  to  every  corporation,  when  such  powers  are 
not  granted  in  the  general  statutes,  and  such  further 
powers  as  are  expressly  stated  in  the  charter  or  articles 
of  incorporation  together  with  such  other  powers  as  are 
incidental  to  the  proper  carrying  out  of  the  powers  ex- 
pressly granted  or  implied. 

"  An  incidental  power  is  one  that  is  directly  and  im- 
mediately appropriate  to  the  execution  of  the  specific 
power  granted,  and  not  one  that  has  a  slight  or  remote 
relation  to  it."  ^  The  expression  "  consistent "  is  some- 
times used  in  the  place  of  "  incidental."  "  Consistent 
means  standing  together,  or  in  agreement  with."  ^ 

"A  corporation  can  make  no  contracts,  and  do  no  acts, 
either  within  or  without  the  State  which  created  it, 
except  such  as  are  authorized  by  its  charter."  ^  But 
these  contracts  and  acts  may  be  made  and  done  in  the 
same  manner  as  the  contracts  and  acts  of  an  individual 
may  be  made  and  done,  and  further,  promises  and  en- 
gagements may  be  implied  from  the  corporate  acts  as  if 
it  were  an  individual.*  In  other  words,  a  corporation 
may,  within  its  expressed  powers,  act  as  a  natural  person 
may  act  in  carrying  out  those  powers.     And  so,  if  in 

1.  Hood  V.  X.  Y..  etc.,  Ey.  Co.,  22  Conn.  1. 

2.  Lucas  V.  White,  etc.,  Co.,  70  Iowa.  541. 

3.  ■Rank  of  Augusta  v.  Earle.  1.3  Pot.    (39  U.  S.)    .'510. 

4.  Bank  of  U.  S.  v.  Dandridcrp.  12  Wheat.   (2G  U.  S.)   64. 

["G] 


COEPOEATE   POWEES   AND   ULTEA  VIEES.  77 

carrying  out  the  purposes  for  which  it  was  expressly 
created,  it  becomes  necessary  to  act  in  a  mamier  not  ex- 
pressly provided  for  by  statute,  it  may  do  so,  provided, 
of  course,  the  act  be  not  expressly  prohibited. 

"  The  doctrine  is  not  that  an  express  power  conferred 
upon  a  corporation  to  accomplish  certain  objects  carries 
with  it,  by  implication,  all  the  poiver  which  might  pos- 
sibly, under  given  circumstances,  be  called  into  exercise 
to  effectuate  those  objects.  The  meaning  rather  is,  that 
it  carries  with  it,  by  implication,  a  grant  of  the  right  to 
use  all  such  powers  as  a  natural  person  might  properly 
and  lawfully  use  to  accomplish  the  same  results  under 
similar  circumstances  *  *  *  subject  to  these  and 
similar  limitations  (the  prohibitions  of  the  Constitutions 
and  the  general  principles  of  the  common  law),  the  gen- 
eral rule  therefore  is,  that  if  the  means  employed  are 
reasonably  adapted  to  the  ends  for  which  the  corpora- 
tion was  created,  they  come  within  its  implied  or  inci- 
dental powers,  though  they  may  not  be  specifically  desig- 
nated by  the  act  of  incorporation."  ^ 

The  question  of  what  is  or  is  not  "  incidental  "  or 
"  consistent "  with  the  proper  exercise  of  express  cor- 
porate powers  will  depend  upon  the  circumstances  of 
the  particular  case  in  hand,  and  cannot  therefore  be 
stated  in  definite  form.  In  construing  the  powers  of 
coi-porations,  the  courts  are  inclined  to  interpret  them 
fairly  and  with  the  idea  in  mind  to  protect  the  private 
rights  of  the  corporation,  its  shareholders,  the  creditors, 
and  the  public  generally. 

"  We  know  of  no  rule  or  principle  by  which  an  act 
creating  a  corporation  for  certain  specific  objects  or  to 
carry  on  a  particular  trade  or  business  is  to  be  strictly 
construed  as  prohibitory  of  all  other  dealings  or  trans- 
actions not  coming  within  the  exact  scope  of  those  desig- 
nated.   Undoubtedly  the  main  business  of  a  corporation 

5.  4  Thompson,  §  5641,  and  cases  cited. 


78       SUMMARY    OF    LAW    OF    PRIVATE    CORPOEATIONS. 

is  to  be  confined  to  that  class  of  operations  which 
properly  appertain  to  the  general  purposes  for  which  its 
charter  was  granted.  But  it  may  also  enter  into  con- 
tracts and  engage  in  transactions  which  are  incidental 
or  auxiliary  to  its  main  business,  or  which  may  become 
necessary,  expedient,  or  profitable  in  the  care  and  man- 
agement of  the  property  which  it  is  authorized  to  hold 
under  the  act  by  which  it  was  created."  ° 

a  *  *  *^  Corporations  have  none  of  the  elements 
of  sovereignty,  *  *  *  they  cannot  go  beyond  the 
powers  granted  them,  and  *  *  *  they  must  exer- 
cise such  granted  powers  in  a  reasonable  manner.  *  *  * 
the  court  must  judge  in  each  case  whether  the  exercise 
of  the  power  be  reasonable."  "^ 

§  57.  Presumption  as  to  corporate  acts. —  The  maxim 
of  right  acting  is  responsible  for  the  statement  fre- 
quently made  that  the  acts  of  a  corporation  are  pre- 
sumed to  be  within  their  powers  until  the  contrary  is 
shown,  and  this  presumption  seems  to  find  favor  in 
many  reported  cases  both  in  England  and  America.  It 
has  been  severely  criticised,  however,  as  vague  and  inap- 
plicable, except  in  connection  with  the  facts  upon  which 
it  depends.*  It  finds  its  fullest  application  in  connection 
with  the  power  of  a  corporation  to  take  and  hold  real 
property,^  and  its  least  application  in  the  other  general 
powers  of  a  corporation. 

Ultra  Vires  Acts.^** 

§  58.  The  subject  of  conveyances  both  intra  vires 
and  ultra  vires  has  already  been  treated,  and  the  rules 
hereafter  stated  are  applicable  to  corporate  acts,  ex- 

6.  Brown  v.  Winnisimmet  Co.,  11  Allen,  326. 

7.  St.  Louis  V.  Weber,  44  Mo.  547. 

8.  See  Morawetz   (2d  ed.),  §  324;  4  Thompson,  §  5G44, 

9.  Ante,  p.  60. 

10.  See  excellent  article  by  ^Mr.  Thompson  in  28  Am.  Law 
Rev.  376,  and  criticism  of  same  by  Mr.  Pepper  in  9  Harvard 
Law  Rev.  255. 


CORPOKATE   POWERS   AND   ULTRA  VIRES.  79 

elusive  of  the  power  to  take,  hold,  and  convey  real 
property. 

In  dealing  with  the  subject  of  ultra  vires,  it  first  be- 
comes necessary  to  distinguish  between  a  mere  want  of 
capacity  on  the  part  of  the  corporation  and  an  ex- 
press prohibition  against  its  acts.  The  former  may  be 
viewed  in  the  light  of  the  incapacity  of  a  married 
woman  to  act  under  the  common  law,  while  the  latter 
is  unquestionably  illegal. 

§  59.  Meaning. —  "The  contracts  (or  acts)  of  cor- 
porations are  said  to  be  ultra  vires  when  they  involve 
some  adventure  or  undertaking  not  within  the  scope 
of  their  charter,  which  is  their  rule  of  corporate  action. 
In  the  granting  of  charters,  the  legislature  is  pre- 
sumed to  have  had  in  view  the  public  interest;  and 
public  policy  is  (as  the  interest  of  the  stockholders  ought 
to  be)  concerned  in  the  restriction  of  corporations 
within  chartered  limits,  and  a  departure  therefrom  is 
only  deemed  excusable  when  it  cannot  result  in  pre- 
judice to  the  public  or  to  the  stockholders.  As  artifi- 
cial creations  they  have  no  powers  or  faculties,  except 
those  with  which  they  were  endowed  when  created;  and 
when,  as  is  frequently  the  case,  they  act  in  excess  of 
their  powers,  the  question  will  be :  Is  the  act  prohibited 
as  prejudicial  to  some  public  interest,  or  is  it  an  act 
not  unlawful  in  that  sense,  but  prejudicial  to  the  stock- 
holders ?"  " 

§  60.  Origin. —  The  doctrine  of  ultra  vires  is  a  heri- 
tage of  the  older  law  of  England  affecting  municipal 
and  public  corporations.  The  encroachment  of  some 
of  these  corporations  into  the  domain  and  authority  of 
higher  powers  led  to  very  stringent  rules  being  laid 
down  whereby  corporations  were  held  strictly  to  the 
powers  granted,  and  again  and  again  was  the  rule  re- 
iterated that  corporations  possess  no  powers  except  such 

11.  Leslie  v.  Lorillard.   110  K  Y.  51f 


80       SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIOISrS. 

as  are  expressly  granted  or  are  necessarily  implied  to 
carry  into  effect  the  powers  expressly  granted.  Con- 
tracts made  beyond  their  powers  were  void  ah  initio  — 
they  could  not  be  ratjfied  or  renewed,  nor  could  per- 
formance give  validity  to  them.  "When  private  busi- 
ness or  trading  corporations  came  into  prominence, 
these  rules  were  imported  into  the  law  relating  to  them, 
and  the  result  has  been  that  from  the  beginning  to 
the  present  time  the  rules  have  been  undergoing  a 
process  of  modification,  the  end  of  which  has  not  yet 
been  reached.  Indeed,  the  subject  has  been  productive 
of  more  dispute  than  any  one  subject  in  the  law  of  cor- 
porations, and  the  cases  upon  the  subject  are  without 
end  in  numbers.  An  attempt  to  state  definitely  the 
rules  affecting  the  subject  is  almost  futile,  for  the 
reasons  stated,  yet  out  of  the  "  mass  of  cases  we  have 
on  the  subject,"  the  following  may  answer  for  a  day, 

§  61.  The  English  rule. —  In  England  the  general 
rule  as  to  the  powers  of  private  business  or  trading 
corporations  is  that  they  have  either  expressly  or  by 
implication  all  capacities  or  powers,  which  being  reason- 
ably incidental  to  their  enterprise  or  operations,  are  not 
forbidden  them  either  expressly  by  their  charters  or 
by  necessary  inference  therefrom. 

"  How  far  those  powers,  which  are  necessarily  or 
properly  to  be  exercised  for  the  purposes  intended  by 
the  act,  extend  may  very  often  be  a  subject  of  great 
difficulty.  We  cannot  always  ascertain  what  they  are. 
*  *  *.  I  believe  they  have  the  power  to  do  all 
such  things  as  are  necessary  and  proper  for  the  purpose 
of  carrying  out  the  intention  of  the  act  of  Parliament, 
and  they  have  no  power  of  doing  any  thing  beyond  it."  ^^ 

"  *  *  *  If  the  company  is  a  corporation  only  for 
a  limited  purpose,  and  a  contract  like  that  imder  dis- 
cussion is  not  Mnthin  their  authority,  the  assent  of  aU 

12.  Coleman  v.  Eastern  Co.  Ry.  Co.,  10  Beav.  1. 


CORPOKATE    POWERS    AXD   ULTRA   VIRES.  81 

the  shareholders  to  such  a  contract,  though  it  make 
them  all  personally  liable  to  perform  such  contract, 
would  not  bind  them  in  their  corporate  capacity,  or 
render  liable  their  corporate  funds."  ^^ 

From  these  statements  it  may  be  gathered  that  con- 
tracts ultra  vires  are  incapable  of  performance,  either 
by  or  against  the  corporation,  and  further  that  the  plea 
of  ultra  vires  will  defeat  a  recovery  even  on  a  contract 
which  has  been  either  partly  or  fully  performed  on  one 
side.  The  reasons  for  these  rules  are  found  in  the  in- 
terest which  the  public  and  the  State  have  in  the  proper 
administration  of  the  powers  conferred  by  the  act  of 
incorporation,  and  the  right  of  the  shareholder  to  ex- 
pect that  the  conditions  upon  which  the  act  vvas  ob- 
tained will  be  performed. 

It  has  been  stated  that  the  now  leading  case  in  Eng- 
land has  modified  the  rules  stated  above  and  declared 
in  effect  that  where  a  corporation  is  created  for  a  par- 
ticular purpose,  the  act  creating  it  impliedly  prohibits 
it  from  exercising  any  powers  not  necessary  or  proper 
to  carry  out  that  purpose. ^^  It  is  submitted  that  the 
application  of  this  latter  rule  would  result  in  neither 
greater  or  less  incidental  powers  being  allowed  than 
were  allowed  by  virtue  of  the  former  rules.  The 
difference  between  "  reasonably  incidental  to  their  en- 
terprise or  operations  "  and  "  necessary  or  proper  to 
carry  out  that  purpose  "  cannot  be  dignified  into  a  dis- 
tinction even. 

While  no  recovery  may  be  had  on  contracts  ultra 
vires  at  law,  the  English  courts  allow  recovery  on  the 
ground  of  subrogation,  and  show  a  tendency  to  allow  it 

13.  East  Anglian  Ry.  Co.  v.  East.  Co.'s  Ry.,  11  C.  B.  775. 
In  support  of  these  eases  see  Chambers  v.  M.  &  M.  Ry.  Co.,  5 
B.  &  S.  588;  Eastern  Ry.  Co.  v.  Hawkes,  5  H.  L.  C.  381;  Taylor 
V.  C.  &  M.  Ry.,  L.  R.,  2  Ex.  3.56. 

14.  Asbury  Co.  v.  Riche,  L.  R.,  9  Ex.  224.  See  Mr.  Thompson's 
article  above  cited. 

6 


82       SUMMARY    OF    LAW    OF    PEIVATE    COEPORATIONS. 

ou  implied  or  quasi-contract,  on  the  ground  that  a  cor- 
poration must  account  for  benefits  received. ^^ 

§  62.  The  United  States  rules. —  There  are  two  op- 
posing judicial  conceptions  of  public  policy.  The 
United  States  Supreme  Court,  and  the  courts  of  Mas- 
sachusetts, Alabama,  and  a  few  others  have  declared 
themselves  in  favor  of  maintaining  the  existing  restric- 
tions upon  the  coi-porate  power  to  contract,  and  they 
have  very  generally  refused  to  enforce  unauthorized 
or  prohibited  contracts,  even  in  favor  of  the  party  who 
has  fully  performed.  In  other  words,  a  corporation  has 
such  powers,  and  such  powers  only  as  are  conferred 
upon  it  by  its  charter.  These  powers  may  be  conferred 
upon  a  corporation  expressly  and  impliedly, —  impliedly 
because  they  are  incidental  to  corporate  existence,  and 
again  because  they  are  necessary  to  exercise  the  powers 
expressly  conferred.^*"  The  reasons  given  for  their  ad- 
herence to  these  rules  are:  (1)  the  interest  of  the  public 
demands  that  the  corporation  shall  not  transcend  its 
powers;  (2)  the  interest  of  the  shareholders  demands 
that  the  capital  shall  not  be  subjected  to  the  risk  of 
enterprises  not  contemplated  by  the  charter,  and  there- 
fore not  authorized  by  the  stockholders  in  subscribing 
for  the  stock;  (3)  the  obligation  or  duty  of  every  one 
entering  into  a  contract  with  a  corporation  to  take 
notice  of  the  legal  limits  of  its  powers.^^ 

This  rule  obtains  in  all  its  rigor  whether  contracts 
are  executory,  or  executed  in  part.  In.  other  words,  no 
liability  will  be  allowed  on  the  contract,  but  where  one 
side  has  been  unjustly  enriched,  the  courts  will  allow 

15.  Ke  Cork,  etc.,  Ry.  Co.,  L.  R.,  4  Ch.  App.  748. 

16.  Thomas  v.  Railway  Co.,  101  U.  S.  71;  Penn.  Ry.  Co.  v. 
St.  L.,  etc.,  Ry.  Co.,  118  id.  290;  Oregon  Ry.  Co.  v.  Oregonian 
Ry.  Co.,  130  id.  1 ;  Pittsburg,  etc.,  Ry.  Co.  v.  Keokuk  Bridge  Co., 
131  id.  371;  Central  Transportation  Co.  v.  P.  P.  C.  Co.,  139  id.  24. 

17.  Pittsburg,  etc.,  Ry.  Co.  v.  Keokuk  Bridge  Co.,  131  U.  S. 
371. 


CORPORATE   POWERS   AND   ULTRA   VIRES.  83 

a  disaffirmance  of  the  contract  and  a  recovery  on  quasi- 
contract.'^ 

§  63.  The  opposing  and  general  rule  in  the  United 
States. —  On  the  other  hand,  the  courts  of  Pennsylvania, 
New  York,  Indiana,  Illinois,  Minnesota,  and  many 
others  have  refused  to  allow  a  party  who  has  benefited  to 
take  advantage  of  the  defect  of  power  when  an  action  is 
brought  to  enforce  a  contract. ^^  They  endeavor  to 
work  this  out  on  the  ground  of  estoppel,  but  this  is 
only  a  bridge,  for  no  one  is  estopped  from  pleading 
law.  In  dealing  with  the  reasons  given  by  the  United 
States  court,  it  may  be  said  that  so  far  as  the  public 
is  concerned  they  have  no  interest  until  the  corpora- 
tion does  something  in  conflict  with  the  public  right  and 
injurious  to  the  public  interests.  The  State  may  step 
in,  but  if  it  does  not  assert  its  rights  it  will  be  held 
to  have  waived  them.  As  to  the  interests  of  the  stock- 
holders the  same  rule  applies,  viz.,  that  it  is  time 
enough  to  interfere  when  they  ask  it ;  while  the  doctrine 
of  notice  is  utterly  impracticable  under  our  general 
statutes.^" 

This  latter  rule  is  now  over^vhelmingly  supported  by 
the  weight  of  authority  in  the  United  States.  Indeed, 
the  English  rule,  followed  as  it  is  by  the  United  States 
court,  is  rapidly  disintegrating  and  in  time  will  prob- 
ably give  way  to  the  rule  which  secures  some  justice 
at  least  to  the  parties  interested.  In  the  opinion  of  em- 
inent authorities  on  the  subject,  the  doctrine  of  ultra 
vires  so  far  as  it  relates  to  private  corporations  should 
be  done  away  with,  and  the  later  cases  on  the  subject 
show  that  it  has  all  but  disappeared  from  the  majority 

18.  Morville  v.  A.  T.  Society,  123  Mass.  129;  Cent.  Trans.  Co. 
V.  P.  P.  C.  Co.,  139  U.  S.  24. 

19.  Darst  v.  Gale,  83  111.  136;  Whitney  Arms  Co.  v.  Barlow, 
63  N.  Y.  62;  Argenti  v.  San  Francisco.  16  Cal.  2.56:  N.  Y.  Mutual 
Life  Co.  V.  Willcox.  8  Biss.  (U.  S.  C.)  203;  Chicago,  etc..  By.  Co. 
V.  Derkes.  103  Ind.  520;  Bissell  v.  Mich.  So.  Rv.  Co.,  22  N.  Y.  258. 

20.  Bissell  v.  Mich.  So.  By.  Co.,  22  N.  Y.  258. 


84:       SUMMARY    OF    LAW    OF    PRIVATE    COKPOEATIONS. 

of  jurisdictions.  Given  a  contract  which  is  ultra  vires 
and  at  the  same  time  illegal,  immoral,  opposed  to  sound 
public  policy,  or  prohibited  by  statute  on  grounds  con- 
nected with,  the  public  good  and  no  court  will  enforce 
or  aid  in  enforcing  it,  or  so  much  of  it  as  remains  un- 
executed. Aside  from  this,  the  doctrine  as  it  obtains 
in  England  and  as  followed  in  the  United  States  courts 
is  productive  of  injustice,  and  should  be  done  away 
with. 

It  only  remains  to  state  the  rules  more  definitely  and 
as  it  applies  to  particular  instances. 

§  G4.  Acts  per  se  illegal. —  There  is  no  difference  of 
opinion  in  any  courts,  either  English  or  American,  as 
to  such  acts.  They  cannot  be  enforced,  nor  can  they  be 
ratified,  and  there  is  a  continuing  duty  on  the  part  of 
either  party  to  withdraw  from  such  a  contract,  and 
courts  of  law  and  equity  will  aid  in  restoring  to  the 
other  party  what  he  has  lost  upon  it.^^  So,  too,  when 
statute  expressly  prohibits.^^  The  courts,  however,  pro- 
ceed upon  the  theory  that  ultima  vires  contracts  are 
neither  malum  in  se,  nor  malum  prohibitum,  but  merely 
beyond  the  powers  conferred  by  law. 

§  65.  Contracts  wholly  or  in  part  executory. —  Ultra 
vires  contracts  which  are  wholly  executory  are  consid- 
ered void  and  cannot  bo  enforced  in  any  jurisdiction, 
for  the  courts  will  not  lend  their  assistance  to  enforce 
an  illegal  or  void  contract.  Hence  the  jolea  of  ultra  vires 
is  available  to  either  side.^^ 

Wliere  contracts  are  executory  in  part,  a  part  having 

21.  Providence  Tool  Co.  v.  Norris.  2  Wall.  (69  U.  S.)  45 ;  Visalia, 
etc.,  Co.  V.  Sims,  104  Cal.  326;  Pratt  v.  Short.  70  N.  Y.  437; 
White  V.  Franklin  Bank.  22  Pick.  (Mass.)  181;  Bath  Gas  Light 
Co.  V.  ClaflTv,  151  X.  Y.  24. 

22.  N.  Y.  State,  etc.,  Co.  v.  Hclmer,  77  N.  Y.  64;  Root  v. 
Godard,  3  McLean,  102. 

23.  Asbury,  etc.,  Co.  v.  Riche,  L.  R.,  7  H.  L.  653;  Central 
Trans.  Co.  v.  Pullman's,  etc.,  Co.,  139  U.  S.  24;  Nassau  Bank 
V.  Jones,  95  X.  Y.  115;  Northwestern,  etc.,  Co.  v.  Shaw,  37  Wis. 
655. 


CORPOKATE    POWERS   AND   ULTRA   VIRES.  85 

been  executed,  the  partial  performance  will  not  aid 
either  party  as  a  basis  of  an  action  to  compel  perform- 
ance of  the  remainder,  or  to  recover  damages  for  the 
failure  to  perform. 

This  is  true  of  all  contracts,  whether  for  the  sale  of 
lands,  leases,  or  contracts  generally.^ 

^  QG.  Contracts  fully  executed  on  both  sides. —  When 
a  contract  has  been  entered  into  between  parties,  and 
one  or  both  is  a  corporation,  and  the  contract  is  ultra 
vires  the  coi*poration,  neither  party  can  avail  them- 
selves of  the  defense,  if  the  contract  has  been  fully 
executed  by  both  sides.^^  "  The  executed  dealings  of 
corporations  must  be  allowed  to  stand  for  and  against 
both  the  parties,  when  the  plainest  rules  of  good  faith 
so  require."  ^^  This  rule  is  based  on  the  maxim  that 
where  both  parties  are  in  fault,  neither  party  is  in  a 
position  to  defend. 

§  67.  Contracts  executed  on  either  side. —  The  Eng- 
lish courts,  and  those  United  States  jurisdictions  wliich 
follow  them,  refuse  to  enforce  performance  by  the 
party  in  default.  The  majority  of  jurisdictions  follow 
the  iiile  that  where  the  contract  has  been  fully  ex- 
ecuted on  one  side,  and  the  party  so  executing  is  suing 
to  recover  the  agreed  consideration,  the  other  party 
will  be  estopped  from  setting  up  the  defense  of  ultra 
viirs.  This  rule  is  based  on  the  principle  that  neither 
party  will  be  allowed  to  receive  the  fruits  or  benefits 
of  a  contract  and  then,  when  sued  for  performance, 
while  keeping  the  fruits  or  benefits,  set  up  the  defense, 
and  thus  work  injustice  to  the  party  executing.     In 

24.  Case  v.  Kellev;  133  U.  S.  1 ;  The  Bank,  etc.  v.  Niles,  Wal- 
ker's Ch.  (Mich.)  99:  Thomas  v.  \Yest  Jersey  Ry.  Co..  101  U.  S. 
71;  Mallorv  v.  Hanover  Oil  Works,  80  Tenn.  598:  Day  v.  Spiral, 
etc.,  Co.,  57  Mich.  146;  McCutcheon  v.  Merz  Capsule  Co.,  37  U.  S. 
App.  586. 

25.  Long  V.  Georgia,  etc.,  Ry.  Co.,  91  Ala.  519:  Day  v.  Spiral, 
etc.,  Co.,  57  Mich.  146:  Lestapies  v.  Ingraham,  5  Pa.  St.  71. 

26.  Parish  v.  Wheeler,  22  X.  Y.  494. 


86       SUMMAEY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

considering  tliis  question,  the  statements  already  made 
as  to  cases  where  public  interest  would  be  involved 
must  be  eliminated;  but  aside  from  such  instances  the 
rule  is  a  very  general  one  and  obtains  whether  the  con- 
tract have  been  executed  by  the  party  contracting  with 
the  corporation,  or  by  the  corporation  itself.^^ 

§  68.  The  rule  as  to  commercial  paper. —  The  general 
power  to  make  and  indorse  commercial  paper  is  among 
the  implied  powers  of  a  corporation,  and  the  innocent 
purcljaser  for  value  of  commercial  paper,  signed  or  in- 
dorsed by  a  coi^ioration,  has  a  right  to  presume  that  the 
payjer  was  made  or  indorsed  in  the  usual  course  of  busi- 
ness, and  is  binding  on  the  corporation,  and  he  can 
therefore  recover  upon  a  bill  or  note  made  or  indorsed 
by  a  corporation,  even  though  such  making  or  in- 
dorsing be  ultra  vires}^  But  commercial  paper  exe- 
cuted by  a  corporation  in  ^^olation  of  an  express 
statutory  prohibition  is  void,  even  in  the  hands  of  an 
innocent  party.^ 

§  69.  Ultra  vires  torts. —  The  general  rule  in  all  juris- 
dictions is  that  corporations  are  liable  in  actions  for 
damages  for  tortious  acts  committed  in  the  prosecution 
of  an  ultra  vires  contract  or  business.^*^  The  reason  for 
this  distinction  between  ultra  vires  torts  and  ultra 
vires  contracts  is  found  in  the  statement  that  the  jiarty 
upon  whom  the  ultra  vires  tort  is  committed  does  not 
voluntarily  consent  to  it,  and  the  law  will  not  hold  him 

27.  Camden,  etc.,  Rv.  Co.  v.  Mays,  etc.,  Ry.  Co..  48  X.  J.  L. 
530;  Arjienti  v.  San  Francisco,  16  Cal.  2.55;  Louisville,  etc.,  Ry. 
Co.  V.  Flanagan,  11.3  Ind.  488;  Manhattan,  etc.,  Co.  v.  Phalen, 
128  Pa.  St.  110;  Whitney  Arms  Co.  v.  Barlow,  63  N.  Y.  02; 
Wright  V.  Pipe  Line  Co.,  101  Pa.  St.  204;  Bath  Gas  Light  Co. 
V.  Claffv,  151  N.  Y.  24. 

28.  Farmers'  Nat.  Bank  v.  Sutton  Mfg.  Co..  52  Fed.  191; 
Bird  V    Daggett.  n7  IMass.  4n4;  Lucas  v.  Pitncv,  27  N.  J.  L.  221. 

29.  Root  V.  Godard,  3  McLean   (U.  S.  C),  102. 

30.  Central  Rv.  Co.  v.  Smith,  76  Ala.  572;  Bisscll  v.  Michigan 
So.  Rv.  Co.,  22  N.  Y.  289;  New  York,  etc.,  Ry.  Co.  v.  Haring, 
47  N.J.  L.  137. 


COEPOEATE   POWEES   AND   ULTEA  VIEES.  87, 

blamable  for  not  anticipating  it  and  intercepting  it.  In 
the  former  case  corporations  are  always  held  liable, 
■while  in  tlie  latter  they  are  not  always  held  for  a 
breach  of  contract. 

§  70.  Shareholder's  right  to  prevent  ultra  vires  acts 

In  the  United  States  courts  and  in  those  jurisdictions 
which  agree  with  them,  the  shareholders  have  a  stand- 
ing in  equity  to  set  aside  ultra  vires  acts  done  by  the 
corporation  or  its  managing  directors  and  officers,  pro- 
vided all  legal  means  of  redress  have  been  exhausted.^^ 
But  this  right  will  not  be  conceded  in  the  majority  of 
jurisdictions,  when  the  acts  complained  of  have  been 
either  partially  or  wholly  executed  on  one  or  both 
sides,  unless  some  public  interest  be  involved.  Share- 
holders may  prevent  the  commitment  of  executory  ultra 
vires  contracts,  however,  as  they  may  prevent  any  act 
which  amounts  to  a  breach  of  duty  on  the  part  of  the 
corporation,  the  directors  or  officers.^^ 

§  71.  Shareholder's  liability  for  ultra  vires  acts  of  the 
corporation. —  In  the  absence  of  statute,  a  shareholder 
is  not  personally  liable  for  the  ultra  vires  acts  of  the 
corporation.^" 

§  72.  Who  may  plead  ultra  vires. —  From  the  preced- 
ing statements  it  may  be  gathered  that  in  those  juris- 
dictions where  the  defense  is  allowed,  any  party  may 
plead  ultra  vires  and  prevent  a  recovery,  whether  it  be 
the  public,  the  shareholder,  or  one  of  the  parties  to  the 
transaction.  In  jurisdictions  where  the  doctrine  of 
estoppel  obtains,  the  plea  is  not  allowed,  save  in  cases 
involving  public  interests,  when  ultra  vires  may  be  set 
up  by  the  State.  The  statement  of  a  learned  writer 
to  the  effect  that  there  seems  to  be  a  new  and  somewhat 


31.  Railroad  Co.  v.  Ellerman,  105  U.  S.  166. 

32.  See  post,  p.  132. 

33.  Second  Xat.  Bank  v.  Hall.  3.5  Ohio  St.  l.iS:  Searight  v. 
Payne,  2  Tenn.  Ch.  175.  See  for  statutory  liability,  Lovegrove 
V.  Hunt,  58  Me.  9;  Lehman  v.  Knapp,  48  La.  Ann/ 1148. 


bb       SUMMARY    OF    LAW    OF    I'RIVATE    COEPORATIOKS. 

growing  doctrine  that  the  question  cannot  be  raised 
by  either  party  to  the  litigation,  nor  in  collateral  pro- 
ceedings, but  only  in  direct  proceedings  by  the  State 
is  true,  perhaps,  as  far  as  ultra  vires  conveyances  are 
concerned,  and  is  true  in  those  jurisdictions  where  es- 
toppel obtains ;  but  the  statement  is  not  borne  out  by  the 
cases  cited  on  ultra  vires  acts  outside  of  taking,  holding, 
and  conveying  real  property.^ 

34.  See  5  Thompson,  §§  6034-35. 


CHAPTER  VI. 
Liability  of  a  Corporation  for  Torts,  Crimes,  etc. 

§  73.  A  discussion  of  the  various  views  which  obtain 
in  the  different  jurisdictions,  as  well  as  a  discussion  of 
the  subjects  of  torts,  and  agency,  as  they  affect  corpora- 
tions, is  deemed  superfluous,  as  these  subjects  are  not 
properly  within  the  scope  of  the  work  as  outlined. 

Indeed,  the  principles  enunciated  hereafter  do  not 
rest  upon  any  principle  peculiar  to  the  law  of  corpora- 
tions, and  when  it  has  once  been  decided  that  a  corpora- 
tion in  the  matter  of  torts  is  to  be  treated  as  an  indi- 
vidual under  similar  circumstances,  it  will  be  readily 
seen  that  these  general  principles  of  torts  and  agency 
obtain  with  equal  force  against  individual  and  corpora- 
tion, without  distinction. 

§  74.  Civil  liability  for  torts. —  "  It  was  formerly  sup- 
posed that  a  corporation  aggregate  could  not  commit  an 
actionable  tort,  and  that  no  action  sounding  in  tort 
would  lie  against  such  a  corporation.  This  conclusion 
rested  upon  the  idea  that  a  corporation  is  an  artificial 
being,  created  by  the  sovereign,  and  endowed  by  the 
sovereign  with  power  to  do  certain  things,  and  none 
other.  *  *  *  The  judges  were  accustomed  to 
reason  that  a  corporation  can  act  only  in  the  mode 
pointed  out  in  its  charter  ^  *  *  *  and  that  when 
those  wdio  have  its  management  or  control,  or  who  act 
for  it  in  a  given  particular,  step  beyond  the  authoriza- 
tion of  the  charter  in  doing  an  act,  it  is  not  the  act 
of  the  corporation,  but  is  their  own  individual  act. 
*  *  *  As  corporations  multiplied,  it  was  seen  that 
intolerable  wrongs  would  be  done,  if  men  could,  by 
clothing  themselves  with  the  immunities  of  corporate 

[89] 


90       SUMMAKY    OF    LAW    OF    PRIVATE    COEPOKATIONS. 

organization,  commit  wrongs  without  being  answerable 
for  them,  for  which  they  would  be  answerable  if  they 
had  committed  them  in  their  natural  capacities.  The 
courts  therefore  while  not  denying  or  repudiating  this 
fiction,  and  in  the  full  face  of  its  logical  results,  have 
been  obliged  to  find  their  way  out  of  the  difficulty  as  best 
they  could;  and  the  result  is,  that  it  is  now  well  settled, 
within  certain  limits,  both  as  to  private  and  municipal 
corporations,  that  whenever  the  agent  of  a  corporation, 
proceeding  within  the  general  scope  of  its  powers  and  of 
the  powers  delegated  by  it  to  him,  commits  a  wrong,  the 
corporation  must  pay  damages  to  the  person  injured, 
just  as  a  natural  person  would  be  compelled  to  do  under 
like  circumstances."  ^ 

"A  corporation  is  liable  to  the  same  extent  and  under 
the  same  circumstances  as  a  natural  person  for  the  con- 
sequences of  its  wrongful  acts,  and  will  be  held  to  re- 
spond in  a  civil  action  at  the  suit  of  an  injured  party 
for  every  grade  and  description  of  forcible,  malicious, 
or  negligent  tort  or  wrong  which  it  commits,  however 
foreign  to  its  nature  or  beyond  its  granied  powers  the 
wrongful  transaction  or  act  may  be."  ^ 

"  Every  tort  committed  by  a  corporation  necessarily 
involves  an  unauthorized  exercise  of  corporate  power ; 
but  that  is  no  reason  why  the  company  should  not  be 
held  liable  for  the  consequences.  If  an  association  is 
guilty  of  a  wrong,  it  seems  very  clear  that  the  fact  that 
the  association  committed  the  wrong  in  a  manner  pro- 
hibited by  law  should  not  deprive  the  injured  party  of 
relief.  Accordingly,  it  is  settled  that  a  corporation  can- 
not set  up  as  a  defense  in  an  action  for  the  wrongful  in- 
vasion of  another's  rights,  that  authority  M-as  not  con- 
ferred by  the  charter  to  do  the  act  complained  of,  in  a 
corporate  capacity.     Mr.  Justice  Swayne  said :     "  Cor- 

1.  5  Thompson,  §  6275. 

2.  New  York,  etc.,  Ry.  Co.  v.  Schuyler,  34  N.  Y.  30. 


LIABILITY    FOR    TOKTS,    ETC.  91 

porations  are  liable  for  every  wrong  they  commit,  and  in 
such  cases  the  doctrine  of  ultra  vires  has  no  application. 
They  are  liable  for  the  acts  of  their  servants,  while  such 
servants  are  engaged  in  the  business  of  their  principal, 
in  the  same  manner  and  to  the  same  extent  that  indi- 
viduals are  liable  under  like  circumstances.  An  action 
may  bo  maintained  against  a  corporation  for  its  mali- 
cious or  negligent  tort,  however  foreigTi  they  may  be  to 
the  object  of  its  creation  or  beyond  its  granted  powers. 
It  may  be  sued  for  assault  and  battery,  for  fraud  and 
deceit,  for  false  imprisonment,  for  malicious  prosecu- 
tion, for  nuisance,  and  for  libel.  In  certain  cases  it  may 
be  indicted  for  misfeasance  or  nonfeasance  touching 
duties  imposed  upon  it  in  which  the  public  are  inter- 
ested. Its  offenses  may  be  such  as  will  forfeit  its  ex- 
istence." ^ 

In  accordance  with  these  principles,  it  is  now  settled 
that  a  corporation  may  be  held  liable  for  damages  for 
maintaining  a  nuisance  ;^  for  committing  a  trespass,^ 
and  this  rule  extends  to  trespasses  upon  the  person,^  and 
in  the  common-law  actions  of  trespass,  trover,  trespass 
on  the  case  ex  delicto,  etc.''^ 

A  corporation  may  also  be  held  responsible  for  an  as- 
sault and  battery,^  for  a  libel  published  by  the  corpora- 
tion," for  false  imprisonment,^'^  for  malicious  prosecu- 

3.  Morawetz  on  Corporations,  §  726,  citing  National  Bank  v. 
Graham,  100  U.  S.  699. 

4.  Baltimore,  etc.,  Ry.  Co.  v.  Fifth  Baptist  Church,  137  U.  S. 
568. 

5.  Illinois,  etc.,  Ry.  Co.  v.  Read,  37  111.  484;  Moore  v.  Fitch- 
burg  Ry.  Co.,  4  Gray,  46.5. 

6.  Denver,  etc.,  Ry.  Co.  v.  Harris,  122  U.  S.  597. 

7.  Hawkins  v.  Dutchess,  etc.,  Co.,  2  Wend.  452 ;  Crocker  v. 
New  London,  etc.,  Ry.  Co.,  24  Conn.  249. 

8.  Coleman  v.  New  York,  etc.,  Ry.  Co.,  106  Mass.  160;  Pas- 
senger Ry.  Co.  V.  Young,  21  Ohio  St.  518. 

9.  Samuels  v.  Evening  Mail  Co.,  75  N.  Y.  604;  revg.  9  Hun 
(N.  Y.),  288;  Evening  Journal  Assn.  v.  McDermott,  44  N.  J.  L. 
430. 

10.  IMoore  v.  Fitchburg,  etc.,  Ry.  Co.,  4  Gray,  465;  Lynch  v. 
Metropolitan  Ry.  Co.,  24  Hun  (N.  Y.),  506. 


92       SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

tion,"  for  conspiracy/^  for  maliciously  prosecuting  civil 
actions/^  for  the  frauds  of  its  agents,"  and  for  negli- 
gence in  the  performance  of  duties  either  imposed  by 
law^^  or  voluntarily  assumed.^*^ 

§  75.  Slander. —  "  May  a  corporation  be  held  liable  in 
an  action  for  slander?  The  rule  of  liability  as  enun- 
ciated in  N.  Y.  &  N.  H.  R.  R.  Co.  v.  Schuyler  {supra) 
certainly  seems  broad  enough  to  include  such  actions. 
Yet  it  is  stated  in  Eichner  v.  Bowery  Bank,  24  App. 
Div.  63,  that  a  corporation  cannot  be  made  liable  in  an 
action  to  recover  damages  for  slander,  apparently  be- 
cause '  The  corporation  itself  could  not  talk.' 

"  'A  corporation  can  act  only  by  or  through  its  officers 
or  agents,  and  as  there  can  be  no  agency  to  slander,  it 
follows  that  a  corporation  cannot  be  guilty  of  slander. 
It  has  not  the  capacity  for  committing  that  wrong.  If 
an  officer  or  an  agent  of  a  corporation  is  gviilty  of  slander 
he  is  personally  liable,  and  no  liability  results  to  the  cor- 
poration.' Townshend  on  Slander  and  Libel,  §  265. 
"  'A  corporation  will  not,  it  is  submitted,  be  liable  for 
any  slander  uttered  by  an  officer,  even  though  he  be 
acting  honestly  for  the  benefit  of  the  company  and 
within  the  scope  of  his  duties,  unless  it  can  be  proved 
that  the  corporation  expressly  ordered  and  directed  that 
officer  to  say  those  very  words,  for  a  slander  is  a  volun- 
tary tortious  act  of  the  speaker.'  Odgers  on  Libel  and 
Slander,  p.  368. 

11.  Vance  v.  Erie  Ry.  Co.,  32  K  J.  L.  334;  Pennsylvania  Co. 
V.  Weddle,  100  Ind.  18;  Reed  v.  Home  Savings  Bank,  130  ]Mass. 
443. 

12.  Buffalo  Lubricating  Oil  Co.  v.  Standard  Oil  Co.,  106  X.  Y. 
669. 

13.  Goodspeed  v.  East  Haddam  Bank,  22  Conn.  530;  Iron  Mt. 
Co.  V.  Mercantile  Co.,  4  Mo.  App.  505. 

14.  Griswold  V.  Haven,  25  N.  Y.  595;  McClellan  v.  Scott,  24 
Wis.  81  ;  Butler  v.  Watkins,  13  Wall.  450. 

15.  Fowle  V.  Alexandria.  3  Cranch,  70. 

16.  Philadelphia,  etc.,  Ry.  Co.  v.  Derby,  14  How.  4fiS.  For 
subject  of  negligence  see  statements  in  extenso,  5  Thompson, 
chap.  140. 


LIABILITY    FOR    TOKTS^    ETC.  93 

"  Such  conclusion  savors  of  retrogression  both  in  mode 
of  reasoning  and  in  manner  of  consideration,  and  rests 
too  literally  upon  the  idea  that  a  corj)oration  is  an  in- 
tangible, ideal  person.  It  is  inconsistent  "with  the  rule 
laid  down  in  N.  Y.  &  N.  H.  B.  R.  Co.  v.  Schuyler,  34 
iN".  Y.  30,  49,  and  also  with  the  decisions  in  analogous 
cases.  If  a  corporation  cannot  talk,  neither  can  it  write 
or  strike,  yet  our  courts  have  held  corporations  liable 
in  actions  of  libel,  assault  and  battery,  malicious  prose- 
cution, and  conspiracy. 

"  If  a  corporation  can  be  held  liable  in  an  action  for 
malicious  prosecution,  no  good  reason  appears  why  it 
should  be  exempt  from  liability  in  an  action  for  slander, 
because  the  nature  of  the  wrong  is  not  unlike  malicious 
prosecution.  The  real  offense  in  each  case  consists  of 
damage  to  reputation,  and  is  effected  by  the  same  means, 
viz.,  speech.  In  each  case  the  plaintiff  claims  injury 
to  character  by  reason  of  improper  charges  or  accusa- 
tion, the  one  being  defamation  in  court,  and  the  other, 
in  pais,  and  recovery  for  the  one  bars  recovery  for  the 
other.  'In  an  action  for  malicious  prosecution,  the 
plaintiff  is  entitled  to  recover  damages  not  only  for  his 
unlawful  arrest  and  imprisonment,  and  for  the  expenses 
of  his  defense,  but  for  the  injury  to  his  fame  and  char- 
acter by  reason  of  the  false  accusation.  The  latter  in- 
deed is,  in  many  cases,  the  gravamen  of  the  action.  An 
accusation  of  crime,  made  under  the  forms  of  law,  or 
on  the  pretense  of  bringing  a  guilty  man  to  justice,  is 
made  in  the  most  imposing  and  impressive  manner,  and 
may  inflict  a  deeper  injury  upon  the  reputation  of  the 
party  accused,  than  the  same  words  uttered  under  any 
other  circumstances.  The  luost  appropriate  remedy  for 
the  calumny  in  such  cases  is  by  the  action  for  malicious 
prosecution.  The  injured  party  cannot  be  entitled  to 
two  recoveries  for  the  same  cause,  and  a  recovery  in 
that  form  must  therefore  be  a  bar  to   a   subsequent 


94       SUMMARY    OF    LAW    OF    FRIVATE    CORPORATIONS. 

action  of  slander,  for  the  same  identical  accusation.' 
Sheldon  v.  Carpenter,  4  IST.  Y.  578,  570."  ^^ 

§  76.  When  a  corporation  is  liable  for  a  tort  committed 
by  an  agent. —  A  corporation  cannot  do  anything  of  it- 
self. It  must  and  always  does  act  through  its  officers 
or  agents,  and  its  responsibility  should  he  determined 
not  by  what  the  artificial  body  can  or  cannot  itself  do, 
but  by  what  it  has  done  through  its  agents,  "  acting  or 
pretending  to  act  about  the  business  for  which  the  or- 
ganization was  formed,  and  for  which  they  were  ap- 
pointed agents."  ^^ 

It  is  a  general  rule  of  the  law  of  agency  that  when- 
ever a  man  employs  an  agent  or  servant  to  act  for  him 
in  a  given  particular,  and  the  agent  or  servant,  when 
so  acting,  commits  an  actionable  wrong  against  a  third 
person,  the  principal  or  master  must  answer  in  dam- 
ages for  that  wrong,  and  this  is  true  irrespective  of  the 
negligence  of  the  principal  or  master  in  employing  the 
agent,  or  in  giving  him  instructions  as  to  his  employ- 
ment and  duties.  Whatever  the  ground  may  be,  the 
law  identifies  the  principal  with  the  agent,  and  holds 
the  former  liable  in  damages  for  the  wrongs  of  the 
latter.  It  has  been  stated  that  a  corporation  stands,  in 
this  respect,  as  in  others,  on  the  same  footing  as  an  in- 
dividual. The  cases  are  numerous  and  uniformly  in 
favor  of  this  proposition.** 

But  in  order  to  render  the  principal  liable  the  act  of 
the  agent  must  have  been  done  within  the  general  scope 
of  the  agency  or  employment,  for  the  principal  is  not 
lial)lo  for  an  act  performed  by  the  agent  when  he  "  steps 
outside  of  the  scope  of  his  employment  to  accomplish 
some  purpose  of  his  own."  ^^ 

17.  Erwin'p  Summarv  of  Torts,  p.  26. 

18.  .5  Thompson.  §  0275. 

19.  Merchants'  Bank  v.  State  Bank,  10  Wall.  (78  U.  S.)  604; 
Milwaukee,  etc.,  By.  Co.  v.  Arms,  91  U.  S.  489. 

20.  5  Thompson,  §  G277,  and  cases  cited. 


LIABILITY    FOK    TOKTS^    ETC.  95 

§  77.  Ratification  of  acts  of  agent. —  A  corporation 
may  ratify  a  wrongful  act  j)erformed  or  committed  by 
its  agent  or  employee,  and  if  it  does,  will  be  held  liable 
for  such  acts,  on  the  general  principle  of  ratification  or 
adoption. 

There  seems  to  be  an  exception  as  to  ratification  of 
torts,  however,  for  the  principle  of  estoppel  has  no 
application  here,  and  unless  the  superior  agents  rati- 
fying the  act  constituting  the  tort  have  authority,  as 
between  themselves  and  the  corporation,  to  bind  the 
corporation  by  their  ratification,  it  cannot  be  held.^^ 

§  78.  Damag-es  recoverable. —  The  common  law  allows 
an  individual  to  recover  full  compensation  for  an  injury 
suffered  by  him,  and  corporations  are  not  to  be  distin- 
guished in  this  respect.  The  general  rule  is  that  in  the 
case  of  corporations  the  measure  of  damages  is  the 
same  as  in  actions  against  individual  masters  or  prin- 
cipals. This  general  principle  is  productive  of  some 
difference  of  opinion,  however,  when  it  reaches  to  the 
liability  of  a  corporation  for  exemplary  damages.  Ex- 
emplary damages  can  only  be  reasoned  out  on  the 
ground  of  "  public  policy,  expediency,  and  public 
safety  " — "  a  reason  which  puts  an  end  to  all  argiunent." 
Repeated  adjudications  have  settled  the  general  rule  in 
the  United  States  that  exemplary  damages  may  be 
given  against  a  corporation  in  any  cases  where  such 
damages  might  be  awarded  against  an  individual.^^  The 
difference  of  opinion  spoken  of  is  not  as  to  the  granting 
of  exemplary  damages,  but  as  to  the  circumstances 
under  which  such  damages  will  be  awarded  against 
corporations.^ 

21.  Cumberland,  etc.,  Canal  Co.  v.  Portland.  62  Me.  508.  Conf. 
Goddard  v.  Grand  Trunk  Ry.  Co.,  57  Me.  202;  Thaver  v.  Boston, 
19  Pick.  511:   Ross  v.  Madison,  1  Ind.  281. 

22.  Lake  Shore,  etc..  Ry.  Co.  v.  Prentice,  147  U.  S.  101; 
Springer,  etc.,  Co.  v.  Smith,  16  Lea  (Tenn.),  498;  Caldwell  v. 
N.  J.  Steam,  etc.,  Co.,  47  N.  Y.  282;  Singer  Mfg.  Co.  v.  Hold- 
fodt.  80  111.  455. 

23.  5  Thompson,   §  6384^. 


9G       SUMMAliV    OF    LAW    OF    PKIVATE    COEPOEATIOlSrS. 

§  79.    Criminal  liability    for    torts,    acts,    etc The 

fiction  which  identifies  principal  and  agent  or  master 
and  servant  in  their  liability  for  civil  damages  arising 
out  of  torts  has  no  application  in  such  acts  as  involve 
malice  or  intention  on  the  part  of  the  offender.  That 
corporations  are  subject  to  the  criminal  process  of  in- 
dictment for  nonfeasance  and  misfeasance  there  is  now 
no  doubt.^*  It  was  originally  urged  that  it  was  un- 
necessary to  hold  the  corporations  for  acts  of  mal- 
feasance when  their  officers  might  be  prosecuted. 

"  Of  this  there  can  be  no  doubt.  But  the  public 
knows  nothing  of  the  former,  and  the  latter,  if  they  can 
be  identified,  are  commonly  persons  of  the  lowest  rank, 
wholly  incompetent  to  make  any  reparation  for  the  in- 
jury. There  can  be  no  effectual  means  for  deterring 
from  an  oppressive  exercise  of  power  for  the  purposes 
of  gain,  except  the  remedy  by  indictment  against  those 
who  truly  commit  it  — •  that  is,  the  corporation  acting  by 
its  majority,  and  there  is  no  principle  which  places  them 
beyond  the  reach  of  the  law  for  such  proceedings."  ^"^ 

"  It  is  true  that  there  are  crimes  (perjury,  for  ex- 
ample), of  which  a  corporation  cannot,  in  the  nature  of 
things,  be  guilty.  There  are  other  crimes,  as  treason 
and  murd(jr,  for  which  the  punishment  imposed  by  law 
cannot  be  inflicted  upon  a  corporation,  ^ot  can  they 
be  liable  for  any  crime  of  which  a  corrupt  intent  or 
malus  animus  is  an  essential  ingredient.  But  the  crea- 
tion of  a  mere  nuisance  involves  no  such  element.  It  is 
totally  immaterial  whether  the  person  erecting  the 
nuisance  does  it  ignorantly  or  by  design,  with  a  good  in- 
tent or  an  evil  intent;  and  there  is  no  reason  why  for 
such  an  offense  a  corporation  should  not  be  indicted."  ^^ 

24.  Com.  V.  New  Bedford  Bridge  Co.,  2  Gray  (Mass.),  339; 
State  V.  Portland,  74  Me.  268;  People  v.  Albany,  11  Wend. 
(N.  Y.)    539. 

25.  Lord  Denman  in  Reg.  v.  Great  No.,  etc.,  Ry.  Co.,  9  Ad.  & 
El.  N.  S.   325. 

26.  State  v.  Morris,  etc.,  Ry.  Co.,  23  N.  J.  L.  360. 


LIABILITY    FOE    TOKTS,    ETC.  97 

So  it  has  been  held  that  a  corporation,  is  liable  to  indict- 
ment for  criminal  libel,^  for  keeping  a  disorderly 
house,^^  for  obstracting  na^dgation,^^  for  obstructing  a 
highway, ^^  for  committing  a  public  nuisance,^^  for  Sab- 
bath-breaking,^^ for  failure  to  perform  their  public 
duties,^^  for  failing  to  keep  their  works  in  repair,^^  for 
"usury, ^^  or  for  doing  any  act  which  is  made  indictable 
without  regard  to  the  intention  of  the  offender.^^ 

§  80.  Liability  for  contempt  of  court. —  From  what 
has  already  been  said  on  the  punishment  of  corporations 
for  criminal  acts,  it  must  follow  that  there  is  no  diffi- 
culty in  the  way  of  jjunishirg  it  for  those  contempts 
which  consist  of  disobedience  of  the  judgments,  decrees, 
or  orders  of  a  court  of  justice.  If  this  were  not  so,  jus- 
tice would  be  defeated.^^  A  corporation  may  be  com- 
pelled to  obey  the  orders  of  the  Court  of  Chancery  by  a 
distringas  and  sequestration  of  its  property,^^  and  may 
be  fined  for  violating  an  injunction  of  the  court.^ 

27.  State  v.  Atchison,  3  Lea   (Tenn.),  729. 

28.  State  v.  Passaic,  etc.,  Society,  54  N.  J.  L.  260. 

29.  Com.  V.  Proprietors,  etc..  2  Gray   (Mass.),  339. 

30.  State  v.  Vermont  Cent.  Ry.  Co.,  27  Vt.   103. 

31.  Reg.  V.  Great  No.,  etc.,  Rv.  Co.,  supra. 

32.  State  v,  Baltimore,  etc.,  Ry.  Co.,  15  W.  Va.  362. 

33.  Louisville,  etc.,  Rv.  Co.  v.  "Com.,  13  Bush   (Ky.),  388. 

34.  Danville,  etc.,  Rv."  Co.  v.  Com.,  73  Pa.  St.  29. 

35.  State  v.  First  Xat.  Bank,  2  S.  Dak.  568. 

36.  Regina  v.  Bradford,  etc.,  Co.,  6  B.  &  S.  631;  State  v. 
Murfreesboro,  11  Humphr.  (Tenn.)  217;  Brennan  v.  Tracy,  2 
Mo.  App.  540. 

37.  People  v.  Albany,  etc.,  Ry.  Co.,  12  Abb.  Pr.  171;  Rochester, 
etc.,  Rv.  Co.  V.  New  York,  etc..  Rv.  Co.,  48  Hun   (N  Y.),  90. 

38.  iVTcKim  v.  Odom,  3  Bland's  Ch.  (Md.)  420;  Reed  v.  North- 
western Ry.  Co.,  32  Pa.  St.  257. 

39.  Mayor,  etc.  v.  New  York,  etc.,  Ferry  Co.,  64  N.  Y.  622. 


CHAPTER  VII. 

MEMBERSHIP  —  ITS     RIGHTS,    REMEDIES,    AND 
LIABILITIES. 

(a)    CAPITAL  STOCK  AND  SUBSCRIPTIONS  THEREFOR. 

(1)  Who  May  Become  Shareholders. 

§  81.  The  relationship  between  a  corporation  and 
its  shareholders  is  purely  contractual.^  In  the  organi- 
zation of  a  coi^ioration,  no  one  may  become  a  subscriber 
to  the  shares  of  stock  who  is  incapable  of  making  a 
contract.  Such  relationship,  however,  is  governed  by 
the  law  in  force  in  the  particular  State  in  which  the 
corporation  is  created.  In  New  York,  for  instance, 
three  or  more  natural  persons  are  required  to  create 
a  corporation.  This  precludes  a  partnership, —  a  cor- 
poration or  other  association,  and  of  course  excludes 
natural  persons  incapable   of  contracting.^ 

§  82.  Infants. —  Unless  statutes  have  been  inter- 
preted so  as  to  preclude  an  infant  becoming  an  original 
subscriber,  there  is  nothing  in  the  common  law  to  pre- 
vent such  a  contract,  though  the  relation  is  subject  to 
the  general  rules  of  infants'  contracts,  and  there  is  no 
doubt  that  an  infant  may  become  a  shareholder  by 
transfer,  subject  to  the  same  rules.  Few  cases  exist 
in  this  country  on  the  subject,  but  in  England  the  rules 
seem  established  as  follows:  if  an  infant  elects  to  hold 
his  shares,  he  must  not  only  pay  the  assessments  and 
calls  thereon,  for  he  cannot  accept  the  benefits  and 
repudiate  the  burdens.^    It  seems,  too,  that  if  he  be- 

1.  1  Morawetz,  p.  43. 

2.  White  on  Corporations   (5th  ed.),  p.  6. 

3.  Mitchell's  Case,  L.  R.,  9  Eq.  C.  363. 

[98] 


WHO    MAY   BECOME   SHAKEHOLDEKS.  99 

comes  a  shareholder  by  transfer,  the  directors  have  the 
power  to  reject  hnn  as  such,  but  unless  they  do  so,  his 
contract  is  good,  being  voidable  only."^ 

§  83.  Married  women, —  Where  the  conunon-law  dis- 
ability of  a  married  woman  exists,  she  cannot  become 
a  subscriber,  nor  can  she  become  a  shareholder  by  trans- 
fer. Many  of  the  States  have  removed  this  disability, 
however,  and  in  such  States  she  is  free  to  contract  as 
a  single  individual  may.  In  case  of  this  disability,  the 
usual  common-law  rules  as  to  the  husband's  right  to 
reduce  to  his  possession,  and  his  liability  thereon  ob- 
tains. 

§  84.  Corporations. —  One  corporation  may  not  be- 
come a  subscriber  to,  nor  obtain  by  transfer,  shares  of 
stock  in  another  corporation,  nor  may  a  corporation 
purchase  its  own  shares,  unless  authorized  to  do  so  by 
statute.^ 

§  85.  Trustees. —  Disability  to  subscribe  personally 
does  not  mean  or  imply  disability  to  own,  and  there 
is  nothing  to  prevent  a  trustee,  as  such,  from  subscrib- 
ing for  and  holding  shares  for  his  cestui.  The  trustee 
in  such  case  becomes  the  legal  owner  of  the  shares,  and 
is  answerable  as  such,  subject  to  the  trust  existing  be- 
tween him  and  his  cestui. 

(2)   Capital  Stock  axd  Shares  of  Stock. 

§  86.  Capital  stock  defined. —  "  The  phrase  'capital 
stock,'  IS  employed  in  acts  of  incorporation,  is  never, 
that  I  am  aware,  used  to  indicate  the  value  of  the  prop- 
erty of  the  company.  It  is  very  generally,  if  not  uni- 
versally, used  to  designate  the  amount  of  capital  to  be 
contributed  by  the  stockholders  for  the  purposes  of  the 
corporation.  The  amount  thus  contributed  constitutes 
the  '  capital  stock '  of  the  company.     The  value  of  the 

4.  Lnmsden's  Case,  L.  R.,  4  Ch.  App.  31. 

5.  See  this  subject,  ante,  p.  72. 


100      SLMMAIJY    OF    LAW    OF    TKIVATE    CORPOKATIONS. 

stock  may  be  greatly  increased  by  surplus  profits  or  be 
diuiinislied  by  losses  but  the  amount  of  the  capital  stock 
remains  the  same. 

"  The  funds  of  the  company  may  fluctuate.  Its  capital 
stock  remains  invariable,  save  by  legislative  enactment. 
This  distinction  between  the  value  of  the  property  of 
incorporated  companies,  and  their  capital  stock  is  per- 
fectly familiar."  "^ 

§  87.  Share  of  stock  defined. — "A  share  of  the  capital 
stock  is  the  right  to  partake,  according  to  the  amount 
put  into  the  fund,  of  the  surplus  profits  of  the  corpora- 
tion ;  and  ultimately  on  the  dissolution  of  it,  of  so  much 
of  the  fund  thus  created,  as  remains  unimpaired,  and 
is  not  liable  for  debts  of  the  corporation.  *  *  *  But 
such  a  right,  that  is,  such  a  share,  cannot  be  issued  and 
delivered  by  a  corporation,  continuing  in  legal  existence, 
and  carrying  on  the  business  for  which  it  was  formed. 
A  demand  that  it  deliver  a  share  of  the  corporate  fund, 
is  to  ask  of  jt  something  which  it  has  not  the  power  to 
do ;  and  which  it  will  not  be  compelled  to  do,  by  judg- 
ment *  *  *.  It  cannot  take  from  the  capital  stock 
the  corporate  fund,  a  part  or  parts  thereof  equal  in 
number  to  the  shares  or  rights  therein,  *  *  *.  "What 
the  corporation  can  do,  is  to  issue  and  deliver  the  writ- 
ten evidence,  of  the  existence  of  such  shares,  and  of 
the  ownership  of  them;  a  paper  usually  called  a  stock 
certificate."  '^ 

"  Shares  are  merely  contract  rights."^  These  rights 
are  evidenced  by  certificates,  which  are  chattels,  or 
choses  in  action,  and  declared  to  be  personal  property, 
and  this  whether  the  property  of  the  corporation  be 
real  or  personal,^  for  as  remarked  above  they  give  their 
owner  no  rights  over  the  property  itself,  but  merely  the 

6.  The  state  v.  Morristown  Fire  Assn.,  23  N.  J.  L.  195. 

7.  Burrall  v.  Bushwick  Ry.  Co.,  75  N.  Y.  211. 

8.  1  Morawetz,  §  200. 

9.  Tregear  v.  Etiwanda  Water  Co.,  76  Cal.  537. 


THE    CONTRACT    OF    MEMBEESHIP.  101 

right  to  share  in  the  profits,  and  to  a  proportionate  share 
upon  dissolution. 

§  88.  The  contract  of  membership. — "  The  relation 
of  stockholders  to  the  corporation  whose  stock  they 
hold  is  that  of  contract;  and  the  rights  and  duties  of 
both  parties  grow  out  of  contract,  implied  in  a  sub- 
scription for  stock,  construed  by  the  provisions  of  the 
charter  or  articles  of  incorporation."  ^^ 

"  Every  element  which  is  essential,  in  the  nature  of 
things,  to  the  existence  of  a  contract,  must  of  course 
be  present  in  the  contract  of  membership  in  a  corpora- 
tion. There  must  be  contracting  parties,  and  these 
parties  must  by  their  mutual  agreements  create  obliga- 
tions among  themselves.  Without  these  elements  no 
true  contract  is  possible.  But  it  is  not  necessary  to 
bring  the  contract  of  membership  in  a  corporation 
within  any  technical  classification  of  common-law  con- 
tracts ;  nor  does  the  validity  of  this  contract  depend 
upon  a  compliance  with  any  form  or  condition  prece- 
dent which  the  common  law  requires  as  a  prerequisite 
to  the  legal  recognition  and  enforceability  of  a  con- 
tract, such  as  the  rule  requiring  a  consideration.  The 
proper  form  of  entering  into  the  contract  of  member- 
ship, and  its  legal  force  and  effect,  depend  entirely 
upon  the  statute  under  which  it  is  created."  ^^ 

"  A  subscription  to  the  stock  of  a  corporation  is  a 
contract,  and  like  other  contracts  must  be  supported 
by  a  consideration.  The  consideration  upon  Avhich  sucli 
a  subscription  rests  is  the  right  secured  by  it  of  mem- 
bership in  the  corporation,  and  the  interests  accruing 
from  such  membership;  and  when  these  are  not  secured, 
and  cannot  legally  result  from  the  subscription,  it  is 
wanting  in  consideration,  as  are  notes  or  other  obliga- 
tions given  for  its  payment."  ^^ 

10.  Supply  Ditch  Co.  v.  Elliott,  10  Colo.  327. 

11.  1  Morawetz,  §  44. 

12.  Grangers'  Life,  etc.,  Co.  v.  Kamper,  7.3  Ala.  32.5. 


102    summary  of  law  of  private  corporations. 

(3)  Subscriptions  for  Stock. 

§  89.  Subscriptions  may  be  generally  divided  into 
subscriptions  before  incorj)oration  and  subscriptions 
after  incorporation. 

"  Tlie  contract  which  exists  among  the  members  of 
a  cori:)oration,  and  which  constitutes  them  a  coq>orato 
association,  is  the  contract  of  membership.  This  con- 
tract gives  the  contracting  parties  the  status  of  share- 
holders; it  invests  them  with  the  continuing  rights  of 
sharcliolders,  together  with  the  corresponding  liabili- 
ties." '^ 

§  90.  Agreements  to  form  a  corporation. —  Where  a 
number  of  persons  mutually  agree  to  become  share- 
holders in  a  corporation  about  to  be  formed,  the  agree- 
ment may  be  said  to  be  an  offer  to  the  corporation  when 
the  same  is  formed,  and  this  offer  may  be  accepted  by 
sueli  corporation  through  its  regular  agents.^*  There 
is  no  contractual  relationship  existing  between  the  sub- 
scribers, even  when  the  agreement  is  worded  "  we 
*  *  *  agree  to  and  with  each  other,"  for  such  an 
agreement  is  not  a  contract. ^^ 

It  follows  from  the  general  principle  of  contracts 
that  an  offer  may  be  withdrawn  before  acceptance,  al- 
though to  amount  to  a  withdrawal  it  should  be  com- 
municated to  the  proper  party. 

Considerable  discussion  pro  and  con  on  this  subject 
has  been  indulged  in  by  eminent  writers,  and  their 
views  are  in  some  instances  upheld  by  a  few  cases,  but 
it  is  submitted  that  tlie  principle  stated  obtain  without 
qualification  on  this  precise  state  of  facts. ^^ 

^  91.  Agreements  and  actual  subscription  distin- 
guished.—  Agreements  to  subscribe  and  actual  subscrip- 

13.  1  Morawetz,  §  46. 

14.  Starritt  v.  Rockland,  etc.,  Ins.  Co.,  65  Mc.  374;  Essex, 
etc.,  Co.  V.  Collier,  8  ]\Ias?.  292. 

15.  Athol  IMusip  Hall  Co.  v.  Carv,  116  Mass.  473. 

16.  Seo  1  Morawetz,  §§  50,  51;  1  Thompson,  §§  1136-95,  and 
cases  cited  therein. 


i 


SUBSCEIPTIONS    FOK    SHAKES.  103 

tion  for  shares  must  be  distingmslied.  The  former  will 
be  governed  by  the  principles  just  stated.  In  the  latter 
case  the  situation  ^^^ll  depend  much  upon  the  question 
of  statute,  which  generally  provides  for  preliminary 
subscriptions.  "  The  statutory  subscription  itself 
(actual  subscription  to  the  articles  of  incorporation) 
constitutes  the  subscriber  a  shareholder,  and  the  lia- 
bility to  pay  the  amount  of  the  shares  is  merely  an 
incident  to  the  contract  of  membership;  it  is  like  the 
liability  of  a  partner  to  contribute  his  share  of  capital 
as  fixed  by  the  partnership  articles.  The  contract  of 
the  shareholders  of  an  incorporated  association  is  in 
reality,  though  not  in  form,  a  mutual  contract,  like 
that  among  the  members  of  an  unincorporated  associa- 
tion, and  the  existence  of  the  association  is  in  each  case 
but  a  result  of  this  contract.  Where  the  stock  sub- 
scriptions are  made  before  incorj^oration,  the  contract 
of  membership  is  consummated  at  the  moment  at  which 
all  conditions  precedent  prescribed  by  law  have  been 
complied  with.  At  this  moment  the  subscribers  assume 
the  status  of  shareholders."  ^^  By  entering  into  an 
agreement  to  take  shares  in  a  corporation  to  be  formed, 
persons  do  not  become  partners,  nor  are  they  liable  as 
principals  for  each  other's  acts  as  agents.^^  The  same 
eminent  authority  states  that  this  is  also  true  even  at 
common  law:  "The  subscribers  are  bound  by  their 
subscriptions  from  the  time  they  are  made.  The  con- 
tract of  the  subscribers  is  not  a  contract  with  the  cor- 
poration, but  a  contract  between  themselves.  It  has 
been  held  that  a  mutual  contract  to  become  sharehold- 
ers in  a  cor|:)oration  to  be  formed  thereafter  is  binding, 
even  at  common  law."  ^^  Agreeing  that  statutory  sub- 
scriptions depend  for  their  validity  upon  the  statutes 

17.  1  Morawetz,  §  56,  and  cases  cited. 

18.  Shiblev  v.   Anjile,   37   N.  Y.   620;    Fav  v.  Nobles,   7   Cush. 
(Mass.)    188:   Thrasher  v.  Pike  County  Ey.'Co.,  25  III.  393. 

19.  1  Morawetz,  §  59. 


104     SUMMARY    OF   LAW   OF    PRIVATE   COEPORATIONS. 

imder  which  tho  corporation  is  created,  and  that  the 
rule  just  stated  obtains  very  generally,  it  is  submitted 
that  a  subscription  to  the  articles  of  incor|3oration  or 
any  other  form  of  paper  under  the  common  law  is  not, 
on  principle,  a  contract,  nor  is  it  binding  to  the  extent 
that  one  may  not  withdraw  before  incorporation  takes 
place;  for  the  relation  between  subscribers  is  not  con- 
tractual, and  there  being  no  party  in  existence  to  accept, 
the  subscription  is  but  an  offer  subject  to  withdrawal 
by  the  offerer.  The  criticism  that  justice  might  bo 
subverted,  or  the  door  opened  to  fraud,  is  met  by  the 
statement  that  this  is  no  more  true  in  the  case  of  a 
corporation  than  in  agreements  between  individuals, 
and  the  law  has  not,  as  yet,  found  it  necessary  to 
change  the  established  principles  because  of  lack  of 
power  to  properly  cope  with  these  two  subjects.  The 
true  rule,  based  on  principle,  is  that  in  the  absence  of 
statute  to  the  contrary,  a  subscription  to  the  articles 
of  incorporation,  or  an  actual  subscription  made  in  any 
other  form  before  incorporation  may  be  withdra"\\Ti  at 
any  time  prior  to  the  filing  of  the  articles  or  actual 
incorporation.^" 

So,  any  event  which  would  be  tantamount  to  a  with- 
drawal of  an  offer  at  common  law  will  act  as  a  "^vitli- 
drawal,  as  the  insanity  or  death  of  the  offerer.^^ 

§  92.  Subscriptions  made  to  a  promoter  before  incor- 
poration.—  If  the  subscription  be  made  to  a  jM-omoter, 
and  the  subscription  amount  to  an  agreement  with  him, 
whereby  he  can  be  held  as  principal,  then  there  is  no 
doubt  but  that  the  agreement  is  a  binding  contract  and 
the  novation  of  the  contract,  whereby  the  corporation, 
after  formation,  takes  his  place  offers  no  difficulty. 
Promoters  do  not  as  a  rule,  bind  themselves  and  if  the 

20.  Auburn  Bolt  &  Xut  Co.  v.  Schultz.  143  Pa.  St.  2.50; 
MeNaupht  v.  Fisher.  90  Fed.  108;  Badsrer.  etc..  Co.  y.  Rose,  95 
Wis.  14.'i:   Starrett  v.  Insurance  Co.,  O.t  'Mo.  374. 

21.  Wallace  v.  Townsend,  43  Ohio  St.  537. 


II 


I 


SUBSCKIPTIONS    FOE    SHARES.  105 

subscription-book  or  papers  recite  that  the  subscriber  is 
not  to  hold  the  promoter,  or  the  circumstances  sur- 
rounding the  transaction  are  such  as  to  lead  to  such 
a  conclusion,  the  promoter  is  not  bound,  and  the  rules 
stated  above  will  obtain.^^ 

§  93.  Subscriptions  after  incorporation. —  After  in- 
corporation, a  contract  of  membership  in  a  corporation 
will  be  created  and  valid,  if  the  requirements  of  the 
statute  and  the  charter  or  articles  of  incorporation  have 
been  substantially  complied  with.  In  the  absence  of 
express  provisions  in  statute  or  charter,  the  matter  is 
in  the  control  of  the  corporation,  and  may  be  regulated 
through  by-laws.^^  Here  both  parties  are  in  esse,  and 
the  formation  of  the  contract  will  take  the  usual  prin- 
ciples of  contract  to  make  it  complete.  In  other  words, 
mutual  assent,  and  acceptance.^^  A  sale  of  shares,  or 
transfer  by  one  shareholder  to  another,  must  be  dis- 
tinguished from  subscriptions,  even  after  incorporation. 
The  former  mil  be  treated  under  the  subject  of  Trans- 
fer.-^ 

§  94.  The  powers  of  agents  receiving  subscriptions — 
Agents,  whether  appointed  under  provisions  of  the 
statute  or  charter  or  by  the  corporation  itself,  are 
limited  strictly  to  the  duties  they  are  required  to  per- 
form, and  no  other  agents  can  bind  the  company  or 
the  other  subscribers,  though  an  irregular  subscription 
may  be  ratified  by  the  proper  agents  or  the  corporation 
and  thus  become  binding.^^  Agents  cannot  release  a 
subscription  when  once  made,^^  nor  can  they  accept 
subscriptions  upon  special  terms,^^  nor  in  any  way  vary 

22.  See  subject  Promoters,  post.  chap.  XII. 

23.  State  v.  Sibley,  25  Minn.  387. 

24.  Dorris   y.    Sweeny,    60   N.   Y.   463;    No.   Cent.    Ry.    Co.   v. 
Eslow,  40  Mich.  222. 

25.  See  post,  chap.  IX. 

26.  M.  &  O.  Ry.  Co.  v.  Yandal,  5  Sneed.  294. 

27.  Lowe  V.  E.  &  K.  Rv.  Co.,  1  Head    (Tenn.),  659. 

28.  Burrows  v.  Smith,  *10  N.  Y.  550. 


106     SUMMARY   .OF   LAW"   OF    PRIVATE    CORPORATIONS. 

the  design  of  the  law  that  all  subscriptions  must  be 
.  j^  ^         terms. 

§  95.  Formalities  and  modes  of  subscription If  the 

statutes  or  the  articles  of  incorporation  prescribe  cer- 
tain fonnalities  to  be  observed,  these  formalities  must 
be  substantially  complied  with,  otherwise  there  will  be 
no  binding  contract.  "  Every  subscription  by  implica- 
tion refers  to  and  incori:)orates  the  terms  of  the  charter 
or  general  law  under  wdiicli  the  corporation  is  to  be 
formed;  and  every  subscriber  agrees  to  become  as- 
sociated with  the  others  only  upon  condition  that  the 
fonnalities  prescribed  by  the  charter  shall  be  observed 
in  making  the  mutual  contract."  ^^  And  this  state- 
ment is  true  wdiether  before  or  after  incorporation, 
though  if  made  before  incoi-poration,  the  formalities 
are  to  be  found  in  the  statutes  or  general  laws.  Illus- 
trations of  such  formalities  may  be  —  requiring  sub- 
scriptions to  be  made  upon*  the  articles  of  incorpora- 
tion, or  after  incorporation  upon  the  stock-books;  the 
payment  of  a  deposit  upon  subscription  either  before 
or  after  incorporation  or  at  any  time  the  subscription 
is  made.  Irregularities  along  these  lines  wall  "  not 
necessarily  prevent  a  person  from  becoming  a  share- 
holder de  facto  wdth  all  the  rights  and  liabilities  of  a 
shareholder  *  *  *.  It  is  an  established  rule  of 
general  application,  that  a  person  who  has  been  recog- 
nized as  a  shareholder,  and  has  acted  as  a  shareholder, 
will  be  liable  as  a  shareholder  both  to  the  company  and 
its  creditors."  ^^ 

Eliminating  statutory  or  charter  formalities,  and  no 
particular  form  of  subscription  is  necessary,  so  long  as 
intention  to  become  a  shareholder  is  indicated,  and  the 
number  of  shares  he  wall  take  and  the  amount  he  is  to 
pay  can  be  fixed. 

29.  Shiirtz  V.  Schoolcraft,  etc.,  Ry.  Co.,  9  Mich.  269. 

30.  1  Morawetz,  §  67. 

31.  1  Morawetz,  §  73. 


SUBSCKIPTIONS    FOE    SHAKES.  107 

The  weight  of  authority  is  in  favor  of  the  rule 
that  subscriptions  for  shares  are  contracts  in  writing, 
and  cannot  be  proved  by  parol  evidence  until  the  ab- 
sence of  the  original  has  been  accounted  for;^^  nor  can 
the  terms  of  the  contract  be  varied  by  parol  evidence.^^' 

(4)   Subscriptions  upon  Conditions. 

§  96.  Subscriptions  for  shares  in  a  corporation  may 
be  made  subject  to  express  conditions,  and  this  both  be- 
fore and  after  incorporation.  It  will  depend  much  upon 
the  conditions  expressed,  whether  the  subscriptions  are 
binding  or  not. 

§  97,  Conditions  precedent. — Subscriptions  made  con- 
ditional upon  the  performance  of  conditions  precedent 
will  not  be  binding  until  the  performance  of  the  con- 
dition. Such  subscription,  whether  before  or  after  in- 
corporation, amounts  to  nothing  more  than  an  offer  to 
become  a  subscriber  after  performance  of  the  conditions, 
and  will  not  ripen  into  a  contract  except  upon  per- 
formance.^^ Such  conditions  may  be:  that  all  or  a  cer- 
tain portion  of  the  capital  stock  be  subscribed  ;^^  that  a 
road  shall  be  located  along  a  certain  route.^^  The  sub- 
scriber is  entitled  to  notice  of  performance,  though  the 
performance  of  the  act  may  be  notice  in  and  of  itself, 
or  a  general  notice  to  all  stockholders  will  be  good.^^ 

32.  Pittsburgh,  etc.,  Ey.  Co.  v.  Gazzam,  32  Pa.  St.  340;  Fan- 
ning V.  Insurance  Co.,  37"  Ohio  St.  330;  Vreeland  v.  N.  J.  Stone 
Co.,  29  N.  J.  Eq.  188.  Conf.  Colfax  Hotel  Co.  v.  Lvon,  69  Iowa, 
683. 

33.  McClure  v.  People's  Freight  Rv.  Co.,  90  Pa.  St.  269; 
Ridgefield,  etc.,  Ry.  Co.  v.  Brush,  43  Conn.  86;  Methodist  Church 
V.  TowTi,  49  Vt.  29.  Conf.  Sodus  Bay,  etc.,  Ry.  Co.  v.  Hamlin, 
24  Hun,  390. 

34.  Santa  Cruz  Ry.  Co.  v.  Schwartz,  53  Cal.  106;  Trott  v. 
Sarchett.  10  Ohio  St.  242. 

35.  Titonic.  etc.,  Co.  v.  Lang,  63  Me.  480;  Cabot,  etc..  Bridge 
Co.  V.  Chapin,  6  Cush.  50;  Hagar  v.  Cleveland,  36  Md.  476. 

36.  McMillan  v,  Mavsville,  etc.,  Rv.  Co.,  15  B,  Mon.  218; 
Evansville.  etc.,  Rv.  Co.'  v,  Dunn,  17  Ind.  603. 

37.  2  Thompson,  §  1333. 


108      SUMMARY    OF    LAW   OF    PlilVATE    CORPORATIONS. 

§  98.  Waiver  of  condition,  etc. —  The  subscriber  may 
waive  conditions  i)rccodent  by  any  act  that  will  amount 
to  an  estoppel,  as  by  acting  as  a  shareholder,^**  or  the 
payment  of  calls  upon  the  subscription  prior  to  per- 
formance of  the  conditions. ^^ 

§  99.  Subscriptions  upon  special  terms. —  Subscrip- 
tions of  this  kind  cannot  be  called  conditional  subscrip- 
tions, but  they  are  absolute  subscriptions  to  which  are 
attached,  it  may  be  said,  conditions  subsequent,  the 
failure  of  which  M'ould  subject  the  corporation  to  an 
action  for  damages.  Such  a  subscription  made  before 
incorporation  or  after  is  treated  as  an  offer  subject  to 
acceptance  by  the  corporation  upon  the  terms  stated, 
and  when  accepted  makes  the  subscribers  shareholders 
immediately.^^ 

As  before  stated,  agents  appointed  to  receive  sub- 
scriptions before  incorporation  have  no  power  to  make 
special  terms,  but  are  authorized  to  receive  subscriptions 
only  upon  the  terms  expressly  or  impliedly  set  forth  in 
the  charter  and  general  laAvs.*^  There  is  no  doubt  but 
that  a  subscriber  may  make  his  subscription  subject  to 
special  terms,  but  it  is  at  most  only  an  offer. 

The  managing  agents  have  a  limited  authority  to 
accept,  after  incorporation,  subscriptions  made  subject 
to  special  terms,  subject  always  to  the  intervening  rights 
of  the  other  shareholders.  Shareholders  have  a  right  to 
expect  that  the  burdens  of  the  corporation  shall  be 
equally  distributed,  as  also  the  profits  of  the  concern, 
and  when  the  special  terms  vary  in  any  substantial  de- 
gree the  burdens  or  rights,  the  other  shareholders  may 

38.  Hutchins  v.   Smith.  4G  Barb.    (N.  Y.)    235. 

39.  Appeal  of  Cornell,  114  Pa.  St.  1.5.3. 

40.  Pittsburjrh.  etc..  Ry.  Co.  v.  Stewart,  41  Pa.  St.  54;  Magee 
V.  Uad^^er,  .30  Barb.    (N.  Y.)   240. 

41.  See  The  Powers  of  Agents,  pp.  10.5,  111. 

42.  Burke  v.  Smith,  16  Wall.   (83  U.  S.)   390;  Upton  v.  Hans- 
borough.  3  Biss.   (U.  S.  C.)   423. 


SUBSCRIPTIONS    FOR    SHAKES.  109 

complain/^  unless,  of  course,  they  have  estopped  them- 
selves by  laches  or  acquiescence  under  circumstances 
which  might  mislead  creditors. 

§  100.  Secret  agreements. — The  above  statement  is  es- 
pecially true  of  secret  agreements  between  a  subscriber 
and  the  agents  of  a  corj)oration,  as  it  is  also  true  of  oral 
agreements.  Such  secret  or  oral  agreements  are  void, 
and  the  subscription  is  enforceable  as  if  no  such  agree- 
ments or  understandings  had  existed.^^ 

"  The  law  offers  to  the  subscriber  membership  and 
stock,  as  the  consideration  for  his  subscription,  and  it 
offers  no  more.  If  he  could  secure  more,  it  would  be  a 
wrong  to  the  other  subscribers,  not  less  than  if  the  stipu- 
lation were  that  he  should  have  a  certificate  for  two 
shares  of  stock  on  payment  of  one.  The  rights  of  all 
subscribers  are  necessarily  equal;  nor  can  there  be  any 
such  thing  as  conditional  membership:  either  the  de- 
fendant in  error  became  a  corporator  on  the  issuing  of 
the  letters  patent,  by  virtue  of  his  subscription,  *  *  * 
or  the  subscription  amounted  to  nothing.  *  *  *  It 
is  the  condition  of  the  subscription  which  is  the  illegal 
part,  it  is  that  which  is  repugnant  to  the  nature  of  a 
subscription,  and  Avhich  is  in  conflict  with  the  policy 
of  the  law,  and  therefore  the  defendant  cannot  assert 
it."  ^^ 

Secret  agreements  made  with  the  agents  of  a  corpora- 
tion after  incorporation,  the  corporation  being  a  party 
to  the  agreement,  could  not  be  enforced  by  the  corpora- 
tion, regardless  of  the  agTeements,  but  if  neither  laches 
or  estoppel  can  be  imputed  to  the  shareholders,  they 
could  enforce  the  subscription  regardless  of  the  special 

43.  Galena,  etc.,  Ry.  Co.  v.  Ennor,  116  III.  55;  Evansville, 
etc.,  Ry.  Co.  v.  Posey,  12  Ind.  363;  Philadelphia,  etc.,  Ry.  Co.  v. 
Conway,   177  Pa.  St.  364. 

44.  Pittsburgh,  etc.,  Ry.  Co.  v.  Biggar,  34  Pa.  St.  455. 


110     SUMMARY    OF   LAW   OF   PRIVATE   CORPORATIONS. 

terms  or  secret  agreements,^^  and  such  subscriptions  v.-ill 
usually  be  enforced  for  the  benefit  of  creditors,  where 
the  corporation  becomes  insolvent/® 

(5)  Fraudulent  Subscriptions. 

§  101.  This  subject  embraces  the  acts  of  promoters  in 
securing  subscriptions  to  a  corporation  about  to  be 
formed,  and  is  more  properly  treated  under  the  subject 
of  promoters  and  their  contracts.^'  Some  attention  must 
here  be  given  to  the  subject  as  it  affects  subscriptions. 

"  It  is  a  general  rule  of  law,  that,  if  a  person  is 
induced  to  enter  into  a  contract  by  false  representations, 
fraudulently  made  by  the  other  contracting  party  or  his 
agent,  the  contract  is  voidable  at  the  option  of  the  inno- 
cent party.  This  rule  applies  with  full  force  both  to 
contracts  of  membership  and  to  contracts  to  purchase,  or 
to  take  shares  in  a  corporation  at  a  future  time.  It 
may  be  stated  as  a  general  rule,  that  if  a  subscription 
for  shares  was  obtained  by  fraudulent  representations, 
it  may  be  annulled  by  the  subscriber  at  any  time  before 
equities  have  intervened.  Lord  Romilly  said,  in  con- 
sidering the  right  of  a  person  to  be  relieved  of  shares 
which  he  had  taken  upon  the  faith  of  a  fraudulent 
prospectus  issued  by  the  company:  '  Contracts  of  this 
description  between  an  individual  and  a  company,  so 
far  as  misrepresentation  or  suppression  of  the  truth  is 
concerned,  are  to  be  treated  like  contracts  between  any 
two  individuals.  If  one  man  makes  a  false  statement 
which  misleads  another,  the  way  in  which  that  is  to  be 
treated  affords  the  example  for  the  way  in  which  a 
contract  is  to  be  treated  where  a  company  makes  a  false 
statement  which  misleads  an  individual.'  "  ^^  The  courts 

45.  See  the  subjects.  Rights  of  Shareholders,  post,  p.  116. 

46.  See  Rijihts  of  Creditors,  post,  p.  199. 

47.  See  post,  chap.  XTI. 

48.  1  Morawetz,  §  94,  citing  Central  Ey.  Co.  v.  Kisch,  L.  R., 
2  H.  L.  99. 


SUBSCKIPTIOXS    FOE    SHAEES.  Ill 

take  into  consideration  the  peculiar  characteristics  of 
such  an  agreement,  and  it  has  been  generally  held  that 
representations  which  concern  matters  of  public  law, 
which  every  one  is  bound  to  notice,^^  as  well  as  repre- 
sentations concerning  the  legal  effect  of  a  subscription, 
about  which  the  subscriber  ought  to  inform  himself,^" 
will  not  even  render  the  subscription  voidable.  So, 
too,  subscriptions  by  an  agent,  which  contain  promises 
as  to  future  acts  of  the  corporation,  cannot  be  avoided, 
amounting  as  they  do  to  matters  of  opinion  only.^^ 

In  order  to  avoid  an  agreement  of  this  kind,  the 
misrepresentations  must  be  such  that  the  subscriber 
was  imposed  upon  after  using  the  caution  of  an  ordi- 
nary business  man,^^  and  the  representations  such  as  to 
be  a  material  inducement  to  the  subscriber  to  become 
such.^^ 

§  102.  Agent's  authority,  etc. —  On  the  general  rule  of 
agency  a  principal  is  bound  by  an  agent  only  when  the 
representations  are  made  within  the  scope  of  his  au- 
thority. But  difficulty  arises  here,  in  that  the  promoter 
may  have  no  principal,  the  corporation  not  yet  exist- 
ing, or  he  may  be  acting  for  the  corporation  after 
incorporation.  In  the  former  case  they  have  no  au- 
thority to  bind  the  company,  and  it  seems  that  whether 
m.ade  in  good  faith  or  through  fraud  the  subscriber 
will  be  held.^*  In  the  latter  case,  i.  e.,  after  incoi-po- 
ration,  fraudulent  representations  will  usually  avoid 
the  subscription.^^ 

49.  Upton  V.  Tribilcock,  91  U.  S.  45. 

50.  Albany,  etc.,  Rv.  Co.  v.  Fields,  10  Ind.  187. 

51.  Fox  V.   Allensville,   etc.,   Co.,   46   Ind.   31;    Miller  v.   Wild 
Cat,  etc.,  Co..  57  Ind.  241. 

52.  Central  Ey.  Co.  v.  Kisch,  supra;  Mead  v.  Bunn,  32  N.  Y. 
275. 

53.  Pulsford  v.  Richards,  17  Beav.  96;  Andrews  v.  Ohio,  etc., 
Ey.  Co..  14  Ind.  109. 

54.  Oldham  v.  Mt.   Sterling,  etc.,  Co.,  103  Ky.  529;   St.  John, 
etc.,  Co.  V.  Munger.  106  Mich.  90. 

55.  Bates  v.   Telegraph  Co.,   134  111.  530;    Salem,  etc.,   Co.   v. 
Ropes,  9  Pick.  187. 


112      SUMMARY    OF    LAW   OF    TKIVATE    COKPOEATIOXS. 

Diligence  is  required  on  the  part  of  the  subscriber 
in  avoiding  the  subscription,  lest  others  be  misled  by 
the  fact  of  his  remaining  a  subscriber.^** 

The  position  of  the  courts  upon  this  subject  of 
fraudulent  subscriptions  is  unsettled  and  confusing  in 
that  the  iiilcs  generally  obtaining  as  to  fraud  seem  to 
have  been  disresrarded.^^ 


(G)  The  Right  to  Rescind  a  Subscriptiox. 

§  103.  English  rule. — "  \Yith  respect  to  the  time 
within  which  a  person  who  has  been  induced  by  fraud 
to  take  shares  in  a  corporation  must  claim  a  rescission 
of  his  contract  in  order  to  be  entitled  to  it,  the  ques- 
tion is  to  be  considered  in  two  aspects:  1.  Where  it 
affects  the  rights  of  other  shareholder's  merely,  the  com- 
pany being  solvent  or  a  "  going  concern."  2.  Where 
it  affects  the  rights  of  creditors,  the  company  having 
stopped  payment,  or  winding-up  proceedings  having 
commenced.  The  authorities  appear  to  justify  the 
following  statements:  1.  The  claim  for  rescission,  in 
order  to  have  any  standing  in  court,  must  he  made  in 
the  shortest  possible  time  after  discovery  of  the  fraud, 
or  after  the  person  seeking  the  rescission  might,  by 
a  fair  exercise  of  his  opportunities  of  knowledge,  have 
discovered  it.  2.  It  will  not  be  entertained,  in  any 
event,  in  the  English  and  Canadian  courts  of  equity, 
after  winding-up  proceedings  have  been  commenced. 
3.  Keither  will  it  be  entertained  after  the  company 
has  stopped  payment  and  the  directors  have  called  an 
extraordinary  general  meeting  of  the  shareholders  for 
the  purpose  of  passing  a  resolution  to  wind  up  the 
company.     4.  It  seems  also  clear,  upon  principle,  that 

56.  Ashley's  Case,  L.  R.,  9  Eq.  2G3 ;  Upton  v.  Tribilcock,  91 
U.  S.  45. 

57.  See  article,  36  Am.  Law  Rev.  855. 


SUBSCRIPTIONS    FOE    SHAKES.  113 

it  will  not  be  entertained  after  the  company  lias  stopped 
pa^Tiient  hj  reason  of  insolvency.     *    *     *."  ^^ 

§  104.  The  rule  in  the  United  States. —  Xo  such  defi- 
nite rules  can  be  declared  as  obtaining  in  the  United 
States.  In  Xew  York  the  rule  seems  to  be  that  a  sub- 
scription obtained  by  fraudulent  representations  may  be 
annulled,  if  the  subscriber  acts  promptly,  and  before  the 
rights  of  creditors  or  subsequent  shareholders  have 
accrued.^^  On  the  other  hand,  there  are  not  wanting 
decisions  which  hold  directly  to  the  contrary,  and  de- 
cided later  than  this  case  and  with  no  reference  to 
it.^°  The  same  degree  of  diligence  as  required  by  the 
English  rule  obtains  in  the  United  States,^^  and  no  re- 
scission will  be  allowed  after  bankruptcy^^  or  insolv- 
ency.^^ The  rules  stated  under  "  Subscriptions  Secured 
through  Fraud,"  etc.,  show  the  circumstances  which 
must  obtain  in  order  to  give  the  subscriber  a  right  to 
rescind,  to  which  should  be  added  the  rule  that  gener- 
ally obtains;  a  material  divergence  from  the  corporate 
scheme  as  contemplated  and  revealed  to  the  subscriber, 
will  release  him  from  his  contract,  and  he  may  recover 
back  any  moneys  paid  by  him  pursuant  to  the  terms.*''* 

In  the  absence  of  fraud,  rescission  of  membership 
cannot,  as  a  general  rule,  be  made  for  the  reason  that 
it  would  amount  to  a  decrease  of  capital  stock.  There 
are  exceptions,  as  where,  by  statute,  the  managing 
agents  have  the  power,  or  where  the  corporation,  by 
statute,  may  deal  in  its  O'^ti  shares,  or  where  it  comes 
into  possession  thereof  through  debts  previously  con- 
tracted, and,  in  order  to  avoid  loss,  takes  such  shares. 

58.  2  Thompson,   §   1439,  citing  Oakes  v.  Turquand,  L.   R.,   2 
H.  L.  325,  and  other  cases. 

59.  ISIcDermott  v.  Harrison,  9  N.  Y.  Supp.   184. 

60.  Oldham  v.  Jit.  Sterling,  etc.,  Co., supra;  St.  Johns,  etc.,  Co. 
V.  Hunger,  supra. 

61.  Upton  V.  Tribilcock,  91  U.  S.  45. 
.   62.  Idem. 

63.  Turner  v.  Grangers,  etc.,  Co.,  45  Ga.  649. 

64.  Mays-s-ille.  etc.,  Co.  v.  Johnson,  109  Cal.  192. 

8 


114    summary  of  law  of  private  corporations. 

Assessments  and  Calls. 

§  105.  The  contract  of  membership  is  based  upon  the 
terms  and  conditions  stated  in  the  charter  or  articles 
of  incorporation,  and  such  other  instruments  as  may 
be  authorized  by  statute  before  incorporation,  and 
through  by-laws  and  resolutions  after  incoi-poration. 
The  shareholder,  upon  subscribing,  agrees  to  associate 
himself  with  the  other  subscribers  upon  the  terms  and 
conditions  stated,  and  becomes  liable  to  pay  his  pro- 
portionate amount  of  the  capital  stock  agreed  upon, 
the  liability  being  based  upon  this  contract.  Tlie 
method  or  manner  by  which  the  capital  stock  is  brought 
together  is  by  "  assessment "  or  ''  call,"  the  two  words 
often  being  used  interchangeably.  Properly  speaking, 
the  term  "  call "  is  applied  to  the  collection  of  unpaid 
subscriptions,  while  the  term  "  assessment "  is  given 
to  sums  required  over  the  fully  paid  or  par  value  of 
the  shares.^^ 

§  106.  When  necessary — If  the  terms  of  the  subscrip- 
tion state  expressly  when  the  amounts  are  to  be  paid, 
no  call  is  necessary,  and  it  is  the  duty  of  the  subscriber 
to  pay  the  amounts  as  they  fall  due,  otherwise  a  cause 
of  action  arises  in  favor  of  the  corporation.*^ 

It  is  usual,  however,  to  leave  all  or  a  portion  of  the 
subscription  subject  to  the  call  of  the  directors,  and 
under  such  circumstances,  a  valid  call  by  the  directors 
or  stockholders  is  a  condition  precedent  to  any  liability 
on  the  part  of  the  subscriber,  and  notice  must  be  given 
to  the  subscriber.*^ 

§  107.  Who  may  make. —  It  goes  without  saying  that 
a  call  must  be  made  by  the  proper  authority.  Gener- 
ally, and  in  the  absence  of  express  provisions  to  the 
contrary,  the  directors  of  the  corporation  may  make, 

65.  Omo  V.  Bernart,  108  Mich.  43. 

66.  Phoenix  Warehousing  Co.  v.  Badger,  67  N.  Y.  294. 

67.  Williams  v.  Taylor,  120  N.  Y.  244. 


I 


ASSESSMENTS   AND    CALLS.  115 

but  if  the  charter  or  by-laws  prescribe  who  shall  make, 
the  power  cannot  be  exercised  by  others.^'^  This  power 
cannot  be  delegated  by  the  board  of  directors,^^  though 
it  seems  the  shareholders  may  delegate  it  to  the  board 
of  directors/*^  legally  constituted  as  suchJ^ 

As  stated,  no  calls  can  be  made  until  all  the  condi- 
tions contained  in  the  subscription  or  other  articles 
have  been  complied  with,^^  though  assessments  for  pre- 
liminary expenses,  where  the  articles  expressly  pro\dded 
for  an  assessment  of  this  kind,  may  be  properly  laid 
even  before  the  corporation  has  the  authority  to  make 
calls  for  the  general  objects  of  the  actJ^ 

§  108.  Manner  of  making  calls. —  Xo  particular  form 
is  necessary  unless  the  method  or  manner  be  expressly 
provided  for.  *  *  *  "  There  should  be  some  act 
or  resolution  which  evinces  or  shows  a  clear  official  in- 
tent to  render  due  and  payable  a  part  or  all  of  the  un- 
paid subscription."  '^'^  If  the  charter  or  by-laws  or  stat- 
utes prescribe  the  manner  of  making  calls,  the  provi- 
sions must  be  carried  out,^^  though  mere  irregularities 
or  informalities  will  not  invalidate,  if  the  provisions 
are  substantially  met.^® 

§  109.  Calls  must  be  equal. —  Justice  requires  that  the 
calls  must  bo  equal  and  made  on  all  alike,^'^  and  made 
by  the  proper  authority,  acting  legally,  and  must  clearly 
fix  the  time  and  mode  of  payment  in  order  that  they  be 
capable  of  enforcement."^^ 

§  110.    Assessments. —  The  general  rule  is  that  when 

68.  People's  Mutual  Ins.  Co.  v.  Wescott.  14  Gray  (Mass.),  440. 

69.  Farmers,  etc.,  Ins.  Co.  v.  Chase,  56  N.  H.  341. 

70.  Rives  v.  Montgomery,  etc.,  Co.,  30  Ala.  92. 

71.  Moses  V.  Tompkins,  84  Ala.  613. 

72.  Salem  Mill,  etc.,  Co.  v.  Ropes,  6  Pick.   (Mass.)   23. 

73.  Idem. 

74.  California,  etc.,  Co.  v.  Callender.  04  Cal.  120. 

75.  People's  Mutual  Ins.  Co.  v.  Wescott.  14  Gray,  440. 

76.  Hays  v.  Pittsburgh,  etc.,  Ry.  Co.,  38  Pa.   St.  81. 

77.  Great  Western  Tel.  Co.  v.  Burnham.  79  Wis.  47. 

78.  Rutland,  etc.,  Ry.  Co.  v.  Thrall,  35  Vt.  536. 


IIG      SUMMAKY    OF    LAW    OF    PKIVATE    COKPOKATIOXS. 

the  liability  of  the  shareholder  to  contribute  the 
amount  of  capital  agreed  upon  at  the  time  he  makes 
his  subscription  has  been  exhausted,  no  further  lia- 
bility exists,  and  further  calls  or  assessments  cannot 
be  made,  unless  provided  by  the  charter  in  express 
termSj^^  or  by  statute.**^  The  latter  provision  is  usu- 
ally taken  advantage  of  only  after  insolvency,  and  for 
the  purpose  of  protecting  creditors. 

§  111.  Calls  upon  increased  capital. —  If  the  capital 
stock  of  a  corporation  already  a  "  going  concern  "  be 
increased,  a  subscriber  to  new  shares  will  be  liable  to 
pay  the  calls  without  regard  to  the  amount  of  the  new 
shares  taken,^^  which  is  a  qualification  to  the  general 
rule  that  calls  cannot  usually  be  made  until  all  the 
capital  stock  has  been  subscribed.^^  The  reason  for  the 
former  rule  is  that  the  subscriber  becomes  a  shareholder 
im.mediately,  and  in  a  going  concern. 

(b)  Rights  A^'D  Remedies  of  Members. 

§  112.  The  rights  of  members  are  properly  divisible 
into  individual  rights  and  collective  rights.  The 
former  are  of  such  a  nature  as  may  be  enforced  by 
each  shareholder  separately  against  the  corporation,  the 
latter  can  only  be  enforced  by  the  shareholder  acting 
for  himself  and  all  other  shareholders,  or  through  the 
corporate  organization,  and  are  classed  by  a  learned 
writer  as  "  rights  in  the  corporate  concern."  ^^  These 
rights  may  be  classified  as  follows: 

Individual  rights: 

To  a  certificate  of  shares. 
To  transfer  his  shares. 

79.  State  v.  Morristown  Fire  Ass.  Co.,  3  Zabr.   (23  N.  J.  L.) 
195. 

80.  Santa    Cruz   Rv.    Co.    v.    Spreckles,    65    Cal.    193;    Price's 
Appeal,  106  Pa.  St.  421. 

81.  Clarke  v.  Thomas.  34  Ohio  St.  46. 

82.  Stoneham.  etc.,  Rv.  Co.  v.  Gould,  2  Gray   (Mass.),  277. 

83.  1  Morawetz,  §  235. 


EIGHTS    OF    MEMBEESHIP.  117 

To  vote  at  the  shareholders'  meeting. 

To  inspect  the  books  of  the  company. 

To  dividends  after  same  is  declared. 
Collective  rights: 

To  interfere  mth  corporate  management. 

§  113.  The  right  to  a  certificate  of  shares "  Where 

one  has  subscribed  for  shares  in  a  corporation  and  has 
paid  for  them,  but  the  corporation  has  nevertheless  re- 
fused to  deliver  to  him  his  share  certificate,  there  is 
judicial  authority  for  the  conclusion  that  he  cannot  elect 
to  treat  the  contract  as  rescinded  and  maintain  an  action 
against  the  cor^Doration  to  recover  the  money  thus  paid 
to  it,  as  so  much  money  had  and  received  to  his  use. 
But  in  such  a  state  of  facts  an  action  in  assumpsit  Avill 
lie  upon  the  implied  promise  of  the  corporation  to  issue 
the  certificate,  and  the  measure  of  damages  is  the  value 
of  the  shares,  or  its  highest  price  in  the  market,  at  any 
time  after  the  demand  and  refusal.^'*  This  decision 
seems  to  proceed  upon  plain  grounds.  By  subscribing 
for  shares  and  paying  for  them  the  subscriber  becomes 
a  shareholder;  and  while  a  share  certificate  is  not  nec- 
essary to  make  him  a  shareholder,  that  being  only  the 
paper  e\adence  of  his  title,®^  yet,  where  the  corporation 
refuses  to  issue  this  certificate  to  him,  its  refusal  may 
be  treated  as  tantamount  to  a  conversion  of  his  shares, 
and  his  right  of  action,  though  called  an  action  in  as- 
sumpsit, is  really  an  action  for  damages  for  the  conver- 
sion of  personal  property."  ^^ 

§  114.  The  right  to  transfer  his  shares. —  This  particu- 
lar subject  will  be  treated  in  a  separate  chapter  under 
the  title  of  "Transfer."  ®^  In  passing,  it  is  enough  to 
note  that  shares  of  stock  being  property,  the  owner 
thereof  has  as  much  right  to  dispose  of  them  as  he  has 

84.  Arnold  v.  Suffolk  Bank.  27  Barb.   (N.  Y.)  424. 

85.  Butler  Univ.  v.  Scoonover,  114  Ind.  381. 

86.  4  Thompson.  §  4458. 

87.  See  post,  chap.  IX,  p.  182. 


118    sum:maky  of  law  of  i'iiivate  coepokations. 

of  any  other  property  belonging  to  him,  unless  by 
charter,  statute,  or  by-law  the  shareholder  is  prevented, 
this  being  part  and  parcel  of  his  contract.  One  learned 
writer  distinguishes  between  the  common-law  right  to 
dispose  of  an  interest  in  a  partnership  and  this  right 
to  dispose  of  shares  of  stock,  which  he  says  is  due  to 
statute.^^  Another  places  it  on  the  ground  of  the  jus 
disponendi  incident  to  ownership  of  property.^^  What- 
ever be  the  reason  the  power  to  sell  is  possessed  in  the 
completest  sense,  subject  to  the  above  limitation  and 
subject  further  to  the  rights  of  creditors. 

And  this  right  is  protected  by  a  court  of  equity 
which,  in  general,  will  compel  a  transfer  upon  the  books 
of  the  corporation  of  the  shares  of  stock,  so  as  to  invest 
the  owner  of  the  equitable  title  with  the  legal  title  also; 
in  other  words,  issue  to  him  a  certificate  of  the  shares. 

"  The  jurisdiction  which  courts  of  equity  exercise 
over  individuals  extends  equally  to  acts  done  or  omitted 
to  be  done  by  private  or  municipal  corporations;  and 
the  power  to  compel  a  transfer  of  specific  property  is 
a  salutary  one,  and  should  be  exercised  where  such 
relief  alone  will  work  a  complete  and  ample  remedy."  ^'^ 

§  115.  The  right  to  vote. —  The  right  to  vote  is  a 
common-law  right.  Originally,  as  in  a  municipal  or 
public  corporation,  members  had  but  one  vote,  and  this 
is  still  true  in  membership  corporations.  Custom  and 
later  statutes  generally  gave  to  each  share  a  vote,  and 
the  rule  in  private  stock  corporations  is  a  very  general 
one  that  each  shareholder  is  entitled  to  one  vote  for 
each  share  of  stock  owned  by  him.  This  rule  was 
founded  on  the  inequality  attaching  to  the  early  rule, 
Avhereby  a  member  owning  one  share  had  as  much  voice 
in  the  management  as  he  who  owned  a  majority  of  the 
stock. 

88.  1  Morawetz,  §§   163,  4. 

89.  2  Thompson,  §  2,300. 

90.  Cushman  v.  Thayer  Mfg.   Co.,   76  N.  Y.  365. 


EIGHTS    OF    MEMBEESHIP.  ll'D 

Shareholders  cannot  be  deprived  of  the  right  to  vote 
unless  the  statute  or  charter  provide  to  the  contrary,  or 
unless  he  has  surrendered  his  rights  by  a  voluntary 
agreement,  as  a  by-law.  Of  course,  if  the  statute  or 
charter  deny  the  privilege,  the  shareholder  takes  subject 
to  all  conditions.  If  he  acquiesce  in  passing  a  by-lav/ 
to  that  effect,  not  only  is  he  bound,  but  his  transferee, 
who  takes  his  rights  and  title. 

§  116.  Who  are  entitled  to  vote. —  Generally  speak- 
ing, only  shareholders  of  record  are  entitled  to  vote. 
If  there  be  a  dispute  as  to  the  shareholder's  right  to 
vote,  the  transfer-books  of  the  coi-poration  will  be 
prima  facie  evidence  of  his  right,^^  and  if  the  right  be 
shown,  equity  will  compel  the  acceptance  of  his  note, 
usually  by  mandamus. 

In  case  of  transfer,  the  vendor  has  the  right  to  vote 
until  the  transferee  has  perfected  his  title  by  having 
the  same  recorded  on  the  stock-book.^^  When  stock 
is  pledged,  the  pledgee  generally  has  the  right  to  vote 
if  the  stock  is  registered  in  his  name,  but  not  other- 
wise,^^ unless  statute  be  to  the  contrary. 

Trustees,  being  the  stockholders  of  record,  have  the 
right  to  vote  the  shares  held  in  trust,  unless  the  cestui 
que  trust  takes  steps  to  prevent  by  having  the  shares 
registered  in  his  name.^  So  it  seems  that  executors  or 
administrators  have  the  same  right,  even  though  the 
shares  be  registered  in  the  name  of  the  decedent.^'' 
A  corporation  cannot  vote  its  own  stock,  which  may 
have  come  to  it  by  purchase  or  through  debts,  or  which 
may  be  unissued.^^  To  allow  this  would  be  in  the  nature 
of  a  fraud  on  the  shareholders,  giving  to  the  coi'poration 
an  undue  advantage  in  holding  the  balance  of  power. 

91.  Com.  V.  Dalzell,  152  Pa.  St.  217. 

92.  ]\IcXeil  V.  Tenth  Nat.  Bank,  4(3  X.  Y.  325. 

93.  Hoppin  v.  Buffum,  9  R.  I.  513. 

94.  Farmers,  etc.,  Co.  v.  Younor,  6  U.  S.  App.  469. 

95.  Re  Cape  May,  etc.,  Nav.  Co.,  51  N.  J.  L.  78. 

96.  Am.  Ry.  Frog  Co.  v.  Haven,  101  Mass.  398. 


120     SUMMARY    OF   LAW    OF   TEIVATE    CORPOSATIOIS'S. 

Where  the  statute  of  a  State  gives  a  corporation  the 
right  to  hold  shares  in  another  corporation,  such  shares 
may  be  voted,^^  unless  there  be  circumstances  such  as 
the  corporation  being  only  a  shareholder  and  having 
no  beneficial  interest,  or  public  poUcy  or  fraud  to  pre- 
clude it.^« 

§  117.  Cumulative  voting. —  The  original  rule  as  to 
voting  gave  one  vote  to  each  shareholder,  regardless 
of  his  holdings.  Custom  and  statute  has  changed  this, 
thereby  making  a  shareholder's  power  in  proportion  to 
his  holding,  and  giving  one  vote  for  each  share.  This 
directly  reversed  the  former  situation  and  gave  to  the 
majority  a  power  over  the  minority  which  practically 
precluded  them  from  representation  upon  the  board 
of  directors,  or  from  having  any  voice  in  the  manage- 
ment of  the  corporation.  To  obviate  this,  cumulative 
voting  was  adopted,  which  gives  to  the  minority  share- 
holders the  power  to  have  representation  upon  the 
board  of  directors,  by  cumulating  their  votes  on  one 
candidate.  For  instance,  suppose  there  are  three 
directors  to  be  elected.  The  majority  have  700  votes, 
the  minority  300.  It  is  evident  that  the  majority  can 
cast  TOO  for  each  of  their  three  candidates.  The  minor- 
ity may  multiply  their  entire  number  of  votes  by  the 
number  of  directors  to  be  chosen  (300  x  3)  and  cast  the 
entire  900  votes  for  one  candidate,  thus  assuring  his 
election  over  one  of  the  majority's  candidates. 

This  method  of  voting  does  not  belong  to  stockhold- 
ers as  matter  of  right,  and  if  not  contained  in  the  char- 
ter or  statute,  cannot  be  enforced,  unless  the  corpora- 
tion adopts  it  in  its  by-laws  —  where  all  consent.^* 
Pennsylvania  has  adopted  this  method  as  a  constitu- 
tional provision.^ 

97.  Ropors  v.  Nashville,  etc..  Rv.  Co.,  91  Fed.  299. 

98.  Clarke  v.  Richmond,  etc.,  Co..  62  Fed.  328. 

99.  Stale  v.  Stncklej',  4.5  Ohio  St.  304;  Pierce  v.  Com.,  104 
Pa.  St.   1.50;  Lowenthal  v.  Rubber,  etc.,  Co.,  .52  N.  J.  Eq.  440. 

1.   See  Pierce  v.  Com.,  104  Pa.  St.  150,  supra. 


RIGHTS    OF    MEMBEESHIP.  121 

§  118.  Proxy  voting. —  Voting  by  proxy  was  un- 
known to  the  coimnon  law.  The  members  of  a  corpora- 
tion must  vote  personally,  nor  can  they  delegate  this 
right  to  others,  unless  the  right  to  do  so  be  conferred  by 
statute  or  charter.  By-laws  of  the  corporation  ^  may 
provide  for  it,  and  this  by-law  may  be  adopted  by  a 
majority  only. 

'^  A  stockholder,  who  desires  to  exercise  his  right  to 
vote  on  his  stock  by  proxy,  is  undoubtedly  bound  to 
furnish  his  agent  with  such  written  evidence  of  the 
latter's  right  to  act  for  him  as  will  reasonably  assure  the 
inspectors  that  the  agent  is  acting  by  the  authority  of 
his  principal.  But  the  power  of  attorney  need  not  be 
in  any  prescribed  form,  nor  be  executed  with  any 
peculiar  formality.  It  is  sufficient  that  it  appear  on 
its  face  to  confer  the  requisite  authority,  and  that  it 
be  free  from  all  reasonable  grounds  of  suspicion  of  its 
genuineness  and  authenticity;  and  the  court,  in  review- 
ing the  proceedings  at  an  election,  must  be  satisfied 
that  the  inspectors  had  reasonable  grounds  for  reject- 
ing the  proxy."  ^ 

On  the  general  principles  of  agency,  a  proxy  may  be 
revoked  at  any  time,  unless  coupled  with  an  interest. 

§  119.  The  right  to  inspect  the  corporate  books. —  The 
right  to  examine  the  corporate  books  and  records  under 
the  common  law  is  a  right  which  existed  from  the 
very  beginning  and  came  from  the  law  of  partnership. 
"  According  to  the  decided  weight  of  authority,  a  stock- 
holder has  the  right  at  common  law  to  inspect  the  books 
of  his  corporation  at  a  proper  time  and  place,  and  for 
a  proper  purpose,  and  that,  if  this  right  is  refused  by 
the  officers  in  charge,  a  writ  of  mandamus  may  issue 
in  the  sound  discretion  of  the  court,  with  suitable  safe- 
guards to  protect  the  interests  of  all.    It  should  not  be 

2.  Phillips  V.  Wickham.  1  Paitre    Ch.    (N.  Y.)   590. 

3.  In  re  St.  Lawrence  Co.,  44  N.  J.  L.  529. 


122     SUMMAEY    OF   LAW   OF    PRIVATE    CORPOEATIONS. 

issued  to  aid  tlie  blackmailer,  nor  withheld  simply  be- 
cause the  interest  of  the  stockholder  is  small;  but  the 
court  should  proceed  cautiously  and  discreetly,  accord- 
ing to  the  facts  of  the  particular  case.  To  the  extent, 
however,  that  an  absolute  right  is  conferred  by  statute, 
nothing  is  left  to  the  discretion  of  the  court;  but  the 
writ  should  issue  as  a  matter  of  course,  although  even 
then,  doubtless,  due  precautions  may  be  taiken  as  to 
time  and  place,  so  as  to  prevent  interruption  of  busi- 
ness or  other  serious  inconvenience."  ^ 

Statutes,  in  many  of  the  States,  have  guaranteed  this 
right,  in  some  cases  declaratory  of  the  common-law 
right,  in  others  extending  it  and  in  some  abridging  it 
in  hours,  time,  and  place. 

§  120.  Books  to  which  the  right  is  applicable — It 
seems  that  all  the  books  of  the  company  are  the  sub- 
ject of  inspection,  unless  the  statute  state  specifically 
what  they  shall  be.  In  the  absence  of  statute  the  mat- 
ter lies  in  the  discretion  of  the  court,  but  the  party 
asking  the  privilege  must  have  some  interest  at  stake 
which  renders  the  inspection  necessary;^  and  must  state, 
usually,  the  particular  books  desired.  The  motive  is 
not  a  subject  of  judicial  investigation,  as  a  lawful 
reason  or  purpose  will  be  presumed  in?  the  absence  of 
proof  to  the  contrary.*^  Idle  curiosity  is  not  a  good 
reason,  however,  nor  must  the  purpose  be  reprehensible.'^ 
As  a  general  rule,  an  inspection*  for  purposes  hostile  to 
the  coi-poration  will  not  be  allowed,  unless  the  right  to 
inspect  is  unqualified  as  at  common  law.^ 

If  the  inspection  bo  desired  to  ascertain  whether  the 
corporate  affairs  are  properly  managed,  it  will  usually 

4.  In  re  Steimvay,  159  N.  Y.  250. 

5.  Legendre  v.  New  Orleans,  etc..  Co.,  45  La.  Ann.  669. 
'6.   Lewis  V.  Brainerd,  5."?  Vt.  510. 

7.  Ke  Crosbv.  28  Misc.   (N.  Y.)    .300. 

8.  HeminwaV  v.  Heminway,  58  Conn.  443;  State  v.  Epstein,  46 
N.  J.  L.  479. 


EIGHTS    OF    MEMBERSHIP.  123 

be  granted,  but  the  reasons  given  must  not  be  mere 
vague  belief  that  there  is  mismanagement,^  or  a  mere 
desire  to  ascertain  the  vahie  of  the  stock.^*^ 

§  121.  Who  may  inspect. —  Directors  have  an  un- 
qualified right/^  as  has  a  stockholder.  The  fact  that 
the  applicant  holds  a  certificate  of  stock  is  generally 
sufficient. ^^  The  party  applying  may  have  the  assist- 
ance of  experts  and  attorneys  or  the  examination  may^ 
be  conducted  by  his  agents,^^  'and  the  right  to  examine 
carries  ^\ith  it,  as  incidental,  the  right  to  make  such 
memoranda  and  copy  as  may  be  necessary.^* 

§  122.  Insolvent  corporations. —  Stockholders  have 
the  right  to  inspect  the  books  of  an  insolvent  corpora- 
tion in  the  hands  of  a  receiver,  but  the  order  of  a 
court  of  equity  must  be  obtained  before  this  can  be 
done.^^ 

§  123.  The  shareholder's  remedy. — An  action  for  dam- 
ages will  lie  against  the  officers  of  the  corporation  for 
refusing  the  rights  of  inspection.^^  Such  relief  is  in- 
adequate, however,  as  there  would  be  great  difficulty  in 
properly  measuring  the  damages.  The  shareholder  asiks 
for  the  exercise  of  a  right,  and  mandamus  is  not  only 
the  preferable  remedy,  but  the  usual  mode  of  enforc- 
ing the  right, ^^  A  court  of  equity  will  interfere,  pro- 
vided there  be  no  legal  remedy  given  under  statute, 

9.  Re  Steinway.  159  N.  Y.  250;  Mitchell  v.  Rubber,  etc.,  Co. 
<N.  J.),  24  Atl.  407;   Lyon  v.  Am.  Screw  Co.,  16  R.  I.  472. 

10.  Re  Crosby,  28  Misc.   (N.  Y.)   300. 

11.  CharlickV.  Flushing  Ry.  Co.,  10  Abb.  Pr.  130. 

12.  Martin  v.  Johnston  Co.,  25  Abb.  N.  C.  350. 

13.  Ellsworth  v.  Dorwart,  95  Iowa,  108;  State  v.  Citizens' 
Bank,  51  La.  Ann.  426. 

14.  Cincinnati,  etc..  Co.  v.  Hoffmeister,  62  Ohio  St.  189;  Martin 
V.  W.  J.  Johnston  Co.,  62  Hun   (N.  Y.),  557. 

15.  Chabe  v.  Nicaragua  Canal,  etc.,  Co.,  59  Fed.  846. 

16.  Lewis  V.  Brainerd,  53  Vt.  510;  Bourdette  v.  Sieward,  52 
La.  Ann.  1333. 

17.  Am.  Ry.  Frog  Co.  v.  Haven.  101  Mass.  398:  Ferguson  v. 
State,  31  N.  J.  L.  285;  Sage  v.  Lake  Shore,  etc.,  Ry.  Co.,  70  N.  Y. 
220. 


124     SUMMARY    OF   LAW   OF    TEIVATE   CORPORATIONS. 

but  the  legal  remedies  must  first  be  exhausted  before 
application  can  be  made  to  a  court  of  equity. 

§  124.  The  shareholder's  right  to  dividends. —  ''  A 
dividend  to  the  stockholders  of  a  corporation,  when 
spoken  of  in  reference  to  an  existing  organization  en- 
gaged in  the  transaction  of  business,  and  not  of  one 
being  closed  up  and  dissolved,  is  always,  so  far  as  we 
are  aware,  understood  as  a  fund  which  the  corporation 
sets  apart  from  its  profits  to  be  divided  among  its  mem- 
bers. A  corporation  of  which  it  is  said  that  it  is  mak- 
ing an  annual  dividend  of  ten  per  centum  upon  its 
stock  is  supposed  to  be  a  prosperous  corporation,  be- 
cause its  gains  leave  it  this  clear  annual  percentage, 
which  it  can  pay  over  without  impairing  its  capital. 
A  dividend  among  preference  stockholders  exclusively 
is  understood  to  imply  that  the  sum  divided  has  been 
realized  as  profits,  though  the  earnings  do  not  yield 
a  dividend  to  the  stockholders  in  general.  We  hazard 
nothing  in  saying  that  this  is  the  primary  and  universal 
understanding  of  -a  dividend  on  stock,  except  when 
made  use  of  in  respect  to  a  final  closing  up  and  distribu- 
tion of  assets  on  the  occurrence  of  insolvency  or  in  view 
of  a  dissolution."  ^^ 

§  125.  "  Profits  "—"  net  profits" — "net  earnings" — 
"  surplus  "  defined. —  It  is  a  general  rule  of  corporate 
law  that  dividends  can  be  declared  only  out  of  the  "  net 
earnings "  or  "  profits "  of  the  business,  for  to  pay 
them  out  of  capital  stock  would  be  to  impair  the  rights 
and  liabilities  of  the  corporation  by  a  reduction  of  the 
capital  stock;  of  the  shareholders  by  reducing  the  value 
of  their  shares;  and  of  creditors  by  reducing  the  assets 
available  for  the  payment  of  their  just  claims.  All 
this  is  opposed  to  sound  public  policy,  and  such  divi- 
dends are  void.^^     These  terms  have  received  various 

18.  Lnckhart  v.  Van  Alstvne,  31  Mich.  75,  and  cases  cited. 

19.  Lockhart  v.  Van  Alst-VTie,  31  Mich.  75;  Hughes  v.  Vermont, 
etc..  Co..  72  X.  Y.  207;  Siiiith  v.  Hurd.  12  Mete.  (Mass.)  371.; 
Belfast,  etc.,  Ey.  Co.  v.  Belfa.st,  77  Me.  445. 


DIVIDENDS.  125 

definitions,  "  The  words  mean,  what  shall  remain  as 
the  clear  gains  of  any  business  venture  after  deducting 
the  capital  invested  in  the  business,  the  expenses  in- 
curred in  its  conduct,  and  the  losses  sustained  in  its 
prosecution."  ^°  "  Profits  generally  mean  the  gain 
which  comes  in  or  is  received  from  any  business  or  in- 
vestment, when  both  receipts  and  payments  are  to  be 
taken  into  account."  ^^  "  The  profits  of  a  company  are 
not  such  sums  as  may  remain  after  the  payment  of 
every  debt,  but  are  the  excess  of  ordinary  receipts  over 
expenses  properly  chargeable  to  revenue  account."  ^^ 
"  The  expression  '  profits  of  a  business  '  means  the  re- 
ceipts, deducting  current  expenses,  and  is  equivalent  to 
net  receipts.  Depreciation  of  buildings  in  which  the 
business  is  carried  on,  though  they  were  erected  by  ex- 
penditure of  capital  invested,  is  not  ordinarily  or  neces- 
sarily considered  in  estimating  profits."  '^ 

While  this  last  statement  may  be  tiTie,  no  well-regu- 
lated business  concern  would  follow  it.  Repairs  from 
depreciation  is  a  current  expense  and  liability,  and  we 
shall  see  that  a  shareholder  may  enjoin  the  payment  of 
dividends  from  "  profits  "  where  this  item  has  been 
totally  disregarded.  In  estimating  profits,  every  con- 
ceivable current' liability  should  be  taken  into  account, 
as  interest  on  bonded  or  floating  indebtedness,  current 
expenses  such  as  taxes,  insurance,  repairs,  assessments 
for  public  improvements,  debts  owing  to  creditors, 
wages  to  employees;  and  further,  a  certain  amount 
should  be  set  aside  for  depreciation  —  in  cases  where 
the  business  requires  buildings  and  machinery  to  prop- 
erly conduct  the  same.  In  case  of  a  bonded  or  floating 
indebtedness  it  is  reasonable  and  prudent  to  provide  for 

20.  Park  v.  Granite,  etc.,  Works.  40  X.  J.  Eq.  114. 

21.  People  V.  Supervisors,  4  Hill   (N.  Y.),  20. 

22.  Mills  V.  Northern,  etc.,  Rv.  Co.,  L.  R..  5  Ch.  App.  621. 

23.  Eyster  v.  Centennial  Board,  etc.,  94  U.  S.  500. 


126      SUMMARY    OF   LAW   OF    PRIVATE   CORPORATIONS. 

the  setting  aside  of  a  certain  portion  of  the  net  earn- 
ings for  a  sinking  fund. 

g  120.  The  rig-ht  to  a  dividend  is  not  a  debt  —  Who 
may  declare. —  "  A  right  to  a  dividend  from  the  profits 
of  a  corporation  is  no  debt  until  the  dividend  is  declared. 
Until  that  time  the  dividend  is  only  something  that 
may  possibly  come  into  existence,  but  the  obligation 
on  the  part  of  the  corporation  to  declare  it  cannot  be 
treated  as  the  dividend  itself."  '■* 

"  Stockholders  have  no  claim  to  a  dividend  until  it 
is  declared.  Until  that  time  it  belongs  to  the  corpora- 
tion precisely  as  any  other  property."  ^^ 

"  Money  earned  by  the  corporation  remains  the  prop- 
erty of  the  corporation,  and  does  not  become  the  prop- 
erty of  the  stockholders,  unless  and  until  it  is  distributed 
among  them  by  the  corporation.  The  corporation  may 
treat  it  and  deal  with  it  either  as  profits  of  its  business, 
or  as  an  addition  to  its  capital.  Acting  in  good  faith 
and  for  the  best  interests  of  all  concerned,  the  corpora- 
tion may  distribute  its  earnings  at  once  to  the  stock- 
holders as  income;  or  it  may  reserve  part  of  the  earn- 
ings of  a  prosperous  year  to  make  up  for  a  possible 
lack  of  profits  in  future  years;  or  it  may  retain  portions 
of  its  earnings  and  allow  them  to  accumulate,  and  then 
invest  them  in  its  own  works  and  plant,  so  as  to  secure 
and  increase  the  permanent  value  of  its  property. 
Which  of  these  courses  shall  be  pursued  is  to  be  deter- 
mined by  the  directors,  with  due  regard  to  the  condi- 
tion of  the  company's  property  and  affairs  as  a  whole; 
and  unless  in  case  of  fraud  or  bad  faith  on  their  part, 
their  discretion  in  this  respect  cannot  be  controlled  by 
the  courts,  even  at  the  suit  of  owners  of  preferred  stock, 
entitled  by  express  agreement  with  the  corporation  to 
dividends  at  a  certain  yearly  rate,  in  preference  to  the 

24.  Lockhart  v.  Van  Alstyne,  31  Mich.  75. 

25.  Goodwin  v.  Hardy,  57  Me,  143. 


DIVIDENDS.  127 

payment  of  any  dividend  on  the  common  stoctk,  but 
dependent  on  the  profits  of  each,  particular  year,  as 
declared  by  the  board  of  directors."  ^^ 

It  will  be  seen  that  the  declaration  of  dividends  gen- 
erally rests  with  the  directors  of  the  corporation,  they 
being  considered  the  managing  and  financial  agents, 
and  in  the  view  of  the  courts  of  equity,  the  trustees. 
Of  course,  the  dividend  must  be  declared  by  the  board, 
legally  sitting  as  a  board.  Their  power  is  subject  to  be 
overruled  and  controlled  by  the  shareholders  in  their 
legal  capacity  as  such,  i.  e.,  at  a  proper  meeting  and  the 
majority  acting.  But  unless  so  overruled,  the  directors 
have  authority  to  declare  dividends  and  to  fix  the  time 
and  method  and  place  of  payment,  within  such  limita- 
tions as  reason  and  good  faith  to  the  stockholders  may 
require.^^ 

§  127.  "  Declared  "—Defined. —  In  order  to  give  a 
shareholder  a  vested  right  in  a  dividend  it  must  have 
been  fully  declared.  This  means  that  it  must  have 
been  voted  by  the  directors  at  a  regular  or  special  meet- 
ing legally  conducted,  and  due  notice  given  to  the  pub- 
lic. When  the  fact  that  a  dividend  has  been  voted  by 
the  directors  is  not  made  public,  nor  communicated  in 
any  way  to  the  stockholders,  the  vote  may  be  re- 
scinded.^® 

§  128.    Who   is    entitled  to   dividends Dividends, 

when  declared,  belong  to  the  party  who  is  the  actual 
owner  of  the  stock.^^  As  between  the  corporation  and 
the  stockholder,  the  stock-book  usually  decides  who  is 
and  who  is  not  a  stockholder.  For  this  purpose  it  is 
usual  to  declare  a  dividend  payable  of  certain  date,  and 
to  the  stockholders  of  record  of  that  date.    To  ascertain 

26.  Gibbons  v.  Mahon,  136  U.  S.  549. 

27.  King  V.  Paterson,  etc..  Rv.  Co.,  29'  N.  J.  L.  82. 

28.  Ford  v.  East  Hampton  Co.,   158  Mass.  84. 

29.  Jermain  v.  Lake  Shore,  etc.,  Ry.  Co.,  91  N.  Y.  483;  Good- 
win V.  Hardy,  57  Me.  143. 


128     SUMMARY    OF   LAW   OF   PRIVATE   CORPORATIONS. 

them  more  definitely,  it  is  usual  to  close  the  transfer- 
books  for  a  short  period,  during  which  no  transfers  are 
made,  and  the  then  stockholders  are  entitled  to  the 
dividend.  But  if  the  corporation  has  notice  that  some 
one,  other  than  the  party  in  whose  name  the  stock  is 
registered,  is  the  real  o"wner,  it  is  bound  to  pay  the 
dividend  to  the  real  owner.^^ 

When  dividends  are  once  declared  and  notice  is  given 
thereof,  the  amount  necessary  to  pay  the  dividend  is 
either  literally  or  constructively  set  apart  by  the  cor- 
poration, and  belongs  to  the  stockholders,  who  are  en- 
titled thereto  upon  application.^^  The  fund  so  sepa- 
rated is  the  property  of  the  stockholder,  and  he  is  en- 
titled thereto  even  in  preference  to  the  creditors  of  the 
corporation.^^  So  if  legally  declared,  and  before  ap- 
plication is  made  therefor,  insolvency  takes  place, 
neither  the  corporation  or  the  creditors  are  entitled  to 
the  amount,  as  it  really  amounts  to  a  trust  fund  in 
the  hands  of  the  corporation  for  the  stockholder,  pay- 
able to  him  upon  •application.^^ 

As  between  the  transferrer  and  transferee  of  shares 
of  stock  it  is  a  well-settled  principle  that  the  dividends 
declared  subsequent  to  the  sale  of  the  stock  belong  to 
the  transferee.  It  is  immaterial  when  they  were 
earned.  If  declared  subsequent  to  the  transfer,  they 
belong  to  the  transferee,  though  they  represent  the 
accumulation  of  years,  and  the  dividend  was  declared 
only  a  day  after  the  transfer.^'*  It  is  unquestioned  that 
the  rule  may  be  varied  by  special  contract,  but  no 
indefinite  understandings  will  vary  it.^ 

30.  Southwestern  Ry.  Co.  v.  Thomason,  40  Ga.  408. 

31.  Grancrer  v.  Bassett,  98  Mass.  462. 

32.  Van  Dyck  v.  INtcQuade.  86  N.  Y.  38. 

33.  Lerov  v.  Insurance  Co.,  2  Edw.  Ch.    (N.  Y.)    657. 

34.  P.oanlman  v.  Lake  Shore,  etc..  Ry.  Co.,  84  N.  Y.  157; 
March  v.  Eastern  Ry.  Co.,  43  N.  H.  515;  Coleman  v.  Columbia 
Oil  Co.,  51   Pa.  St.  74. 

35.  Brewster  v.  Lathrop,  15  Cal.  21. 


DIVIDENDS.  129 

Where  dividends  are  declared  on  one  day  and  made 
payable  at  a  later  day,  they  belong  to  the  owner  of  the 
shares  when  the  dividends  were  declared,  and  a  sub- 
sequent transfer,  made  prior  to  the  day  on  which  the 
dividends  are  payable,  does  not  pass  the  dividends. 
Upon  being  declared,  they  become  a  debt,  and  belong 
of  right  to  the  owner  of  the  stocik  at  the  time  the 
corporation  so  declared.^^ 

When  stock  is  held  in  pledge,  the  pledgee  is  entitled 
to  the  dividends.  It  is  the  right  and  duty  of  the  pledgee 
to  collect  the  dividend  and  to  receive  the  same  for 
the  use  of  the  pledgor.  When  the  stock  is  taken  out 
of  pledge,  the  dividends  must  be  accounted  for.^^ 

A  legatee  usually  takes  shares  of  stock  as  they  were 
at  the  date  of  the  testator's  death.  Dividends  declared 
prior  to,  but  not  payable  until  after,  the  death  of  the 
testator  formed  part  of  the  owTier's  estate  and  do  not 
pass  to  the  legatee  as  income."^ 

In  the  case  of  optional  or  conditional  sales  the  de- 
termination of  the  o^\Tier  of  di\'idends  will  depend  upon 
the  question  as  to  whether  the  sale  was  complete  at  the 
time  the  dividend  was  declared.  If  so  complete  they  go 
to  the  transferee;  if  not  complete  then  to  the  trans- 
ferrer.^^ 

§  129.  Stock  dividends. —  Where  the  property  of  a 
corporation  exceeds  the  limit  named  in  its  charter  for 
its  capital  stock,  the  excess  is  surplus  which  may  be 
divided  among  the  stockholders  either  in  money  or 
property.  To  declare  a  stock  dividend  necessarily 
means  that  the  corj>oration  must  increase  its  stock, 
so  that  the  general  rule  is  that  where  a  corporation  bas 
the  right  to  increase  its  capital  stock,  it  may  make  a 

36.  Hopper  v.  Sage,  112  N".  Y.  .530;  Wheeler  v.  Northwestern 
Co..  39  Fed.  347. 

37.  Guarantee  Co.  v.  East  Rome  Town  Co..  96  Ga.  511. 

38.  Lock  V.  Venables,  27  Beav.  598;  Re  Kernochan,  104  N.  Y. 
CIS. 

39.  Jones  v.  Kent,  80  N.  Y.  585. 

9 


130      SrMMAlIY    OF    LAW    OF    PRIVATE    CORPOKATIONS. 

Stock  dividciul,  if  it  has  aceiimiilated  a  surplus  in  prop- 
erty or  money  equal  in  value  to  the  par  value  of  the 
stock  so  issued/" 

"  There  is  no  jmblic  policy  which,  in  all  cases,  con- 
demns such  dividends.  Shares  having  been  legall}^ 
brought  into  existence  may  be  distributed  among  the 
stockholders  of  a  company.  By  such  distribution  no 
harm  is  done  to  any  person,  provided  the  dividend  is  not 
a  mere  inflation  of  the  stock  of  the  company,  with  no 
corresponding  values  to  answer  to  the  stock  distributed. 
It  may  be  that  a  distribution  of  stock  gratuitously  to 
the  stockholders  of  a  company  based  upon  no  values, 
a  mere  inflation,  or,  to  use  a  phrase  much  in  vogue,  a 
watering  of  stock,  would  be  condemned  by  the  law. 
But  when  a  stock  has  been  lawfully  created,  and  is  held 
by  a  corporation,  which  it  has  a  right  to  issue  for  value, 
then  a  stock  dividend  may  be  made,  provided  that  the 
stock  always  represents  property."  ^^ 

Wlien  a  stock  dividend  is  declared,  and  minority 
shareholders  object,  they  must  be  provided  for,  and 
have  the  right  to  refuse  to  take  the  increased  capital 
stock  in  lieu  of  cash.^^  It  is  usual  to  provided  for  such 
cases  at  the  time  the  dividend  is  declared. 

§  130,  Right  of  the  shareholder  to  compel. —  The 
granting  of  a  dividend  is  a  matter  of  internal  manage- 
ment, resting  in  the  sound  discretion  of  the  directors 
or  stockholders,  and  uncontrolled  by  the  courts.^^  While 
it  is  a  general  rule  that  the  directors  or  majority  stock- 
holders of  a  corporation  are  the  sole  judges  as  to  the 
propriety  of  declaring  dividends  and  the  courts  will 
not  interfere  with  a  proper  exercise  of  their  discretion, 
yet,  when  tlie  right  to  a  dividend  is  clear,  and  there  are 

40.  Williams  v.  Western  Union  Tel.  Co.,  93  N.  Y.  162. 

41.  Williams  v.  Western  Union  Tel.  Co.,  93  N.  Y.  162. 

42.  Idem;   Hoole  v.  Great  Western  Ry.  Co.,  L.  R.,  3  Ch.  App. 
262. 

43.  Williams  v.  Western  Union  Tel.  Co.,  93  N.  Y.   162;   Jack- 
son's Adm.  V.  Newark,  etc.,  Co.,  31  N.  J.  L.  277. 


stockpiolder's  prefekence.  131 

funds  from  wliicli  it  can  properly  be  made,  a  court  of 
equity  will  interfere  to  compel  the  company  to  declare 
it/*  A  very  strong  case  must  be  made  to  require  a 
court  of  equity  to  interfere  mth  the  discretion  of  the 
directors;  their  action  cannot  be  controlled  at  the  in- 
stance of  a  stockholder  unless  it  is  shown  to  be  a  willful 
abuse  of  their  discretion,  or  the  result  of  bad  faith,  or 
a  willful  neglect  or  breach  of  a  known  duty/""  This 
power  will  be  more  readily  granted  where  the  direct- 
ors neglect  or  refuse  to  pay  a  dividend  to  the  preferred 
stocl-liolders,  Avhen  the  finances  of  the  corporation 
justify  it,  and  the  stockholders  are  equitably  entitled 
to  it.--'' 

§  131.  Stockholder's  preference  — on  increase  of  stock. 
—  "  Where  capital  stock  is  increased  by  a  corporation 
for  the  pui']30se  of  increasing  its  capital  by  a  sale  of 
the  stock,  the  latter  belongs  to  the  coi-poration,  until 
disposed  of.  But  where  the  object  is  not  to  increase 
the  capital,  but  the  additional  shares  are  created  on 
account  of  the  existing  capital  or  property  of  the  cor- 
poration, the  entire  stock,  as  then  increased,  represents 
no  more  capital  than  the  original  shares  had  done,  and 
the  new  shares  are  not  owned  by  the  corporation,  but 
as  soon  as  created,  become  the  individual  property  of 
the  owners  of  the  old  shares,  in  proportion  to  their 
holdings."  ^^ 

This  right  of  the  shareholder  to  his  preference  in 
the  distribution  of  the  new  stock  is  based  on  the  law 
of  partnership, — ^when  stockholders  'assume  the  bur- 
dens they  are  entitled  to  such  benefits  as  may  accrue. 
The  coi-jDoration  has  no  right  to  deprive  the  sharehold- 
ers of  this  right,   and  this  is  true  even  if  the   stock 

44.  Belfast,  etc.,  Co.  v.  Belfast,  77  Me.  445 ;  Boardman  v.  Lake 
Shore,  etc.,  Ry.  Co.,  84  N.  Y.  157;  Beers  v.  Bridffeoort  Spring 
Co..  42  Conn.  17. 

45.  Smith  v.  Prattville  Mfg.  Co.,  29  Ala.  503. 

46.  Hazeltine  v.  Belfast,  etc.,  Co.,  79  Me.  411. 

47.  Knapp  v.  Publishers,  etc.,  127  Mo.  53. 


132      SUMMAKY    OF    LAW    OF    PRIVATE   CORPORATIONS. 

bo  increased  for  sale.  The  power  to  iiicrease  is  a  power 
which  is  really  a  tiiist  for  the  subsisting-  shareholders 
in  proportion  to  the  original  stock  held  by  them,  and 
each  of  the  shareholders  has  the  right  to  subscribe  for 
and  take  the  new  stock  in  proportion  to  his  original 
holdings.^^ 

This  right  may  bo  enforced  against  the  corporation 
to  obtain  the  shares,  or  if  otherwise  disposed  of,  dam- 
ages may  be  recovered.  Such  damages  will  be  the  dif- 
ference between  the  highest  manked  price  the  stock 
afterward  reached,  and  the  par  value  together  vnth 
interest  thereon,  if  the  same  can  be  computed.'*''  And 
this  is  true  even  though  the  corporation  became  in- 
solvent wliilo  the  action  was  pcnding.'^^ 

§  132.  Stockholder's  right  to  interfere  with  corporate 
business. —  The  rights  heretofore  discussed  are  the  in- 
dividual rights  of  the  shareholder  as  distinguished  from 
his  collective  rights,  or  in  other  words,  his  right  as  a 
shareholder  to  interfere  with  the  corporate  business 
in  order  to  protect  his  ovm.  as  well  as  the  interests  of 
his  fellow  shareholders.  This  right  is  really  a  three- 
fold right,  yet  rests  entirely  upon  the  one  basis  of 
equitable  relief.  It  is  self-evident  that  the  majority 
must  rule,  in  order  that  anything  shall  be  done  to  make 
a  corporation  prosperous,  yet  there  are  limitations  to 
this  rule,  and  the  stockholder,  in  behalf  of  himself 
and  his  fellows,  may  restrain  (a)  breaches  of  trust  on 
the  part  of  the  officers  or  majority;  (h)  the  commission 
of  ultra  vires  acts  on  the  part  of  the  corporation ;  and 
(c)  bring  and  defend  suits  in  the  name  of  the  corpora- 
tion, where  the  directors  or  majority  refuse  to  act. 

§  133.  limitations  upon  the  power  of  the  majority. — 
"  The  holders  of  a  majority  of  the  stock  of  a  corjiora- 

48.  Erdman  v.   Bovvman,  .58  111.  444;   Gray  v.   Bank,  3  Mass. 
3G3;  Jones  v.  Morrison.  31  Minn.  140. 

49.  Erdman  v.  Bowman ;   Gray  v.  Bank,  supra. 

50.  Reading  Trust  Co.  v.  Reading  Iron  Works,  137  Pa.  St.  282. 


I 


shareholder's  bights  in  equity.  133 

tion  may  legally  control  the  company's  business,  pre- 
scribe its  general  policy,  make  themselves  its  agents, 
and  take  reasonable  compensation  for  their  services. 
But,  in  thus  assuming  the  control,  they  also  take  upon 
themselves  the  correlative  duty  of  diligence  and  good 
faith.  They  cannot  lawfully  manipulate  the  company's 
business  in  their  own  interests  to  the  injury  of  other 
stockholders.  They  cannot  by  their  votes  in  a  stock- 
holders' meeting  lawfully  authorize  its  officers  to  lease 
its  property  to  themselves,  or  to  another  corporation 
foiTued  for  the  purpose  and  exclusively  owned  by  them, 
unless  such  lease  is  made  in  good  faith  and  is  supported 
by  an  adequate  consideration;  and,  in  a  suit  properly 
i^rosecuted  to  set  aside  such  a  contract,  the  burden  of 
proof,  showing  fairness  and  adequacy,  is  upon  the 
party  or  parties  claiming  thereunder.  All  doubts  will 
be  solved  in  favor  of  the  corporation  for  whom  such 
stockholders  assumed  to  act."  ^^ 

§  13-i.  Equity  will  aid  the  shareholder. —  There  has 
been  a  conflict  of  judicial  authority  as  to  how  far  and 
to  what  extent  equity  will  aid.  "  Still,  it  has  been 
found  necessary  for  prevention  of  injuries  for  which 
common-law  courts  were  inadequate  to  entertain  in 
equity  such  a  jurisdiction  in  the  progressive  develop- 
ment of  the  powers  and  effects  of  private  corporations 
upon  all  the  business  and  interests  of  society. 

It  is  now  no  longer  doubted,  either  in  England  or 
the  United  States,  that  courts  of  equity  in  both  have  a 
jurisdiction  over  corporations,  at  the  instance  of  one 
or  more  of  their  members,  to  apply  preventive  reme- 
dies by  injunction  to  restrain  those  who  administer  them 
from  doing  acts  which  would  amount  to  a  violation  of 
charters,  or  to  prevent  any  misapplication  of  tlieii* 
capitals  or  profits  which  might  result  in  lessening  the 
dividends  of  stockholders  or  the  value  of  their  shares, 

51.  J.  C.  Harper  in  note  to  Cook  v.  Sherman.  20  Fed.  175. 


134      SUMMAKY    OF    LAW    OF    PRIVATE    CORPOKATIOXS. 

as  either  may  be  protected  by  the  franchise  of  a  cor- 
poration, if  the  acts  intended  to  be  done  create  what  is 
in  the  hiw  denominated  a  breach  of  tnist.  And  the 
jurisdiction  extends  to  inquire  into  and  to  enjoin,  as 
the  case  may  require  that  to  be  done,  any  proceedings 
by  individuals,  in  whatever  character  they  may  profess 
to  act,  if  the  subject  of  complaint  is  an  imputed  viola- 
tion of  a  corporate  franchise  or  the  denial  of  a  right 
growing  out  of  it,  for  which  there  is  not  an  adequate 
remedy  at  law     *     *     *."  ^^ 

§  135.  When  the  shareholder  may  invoke  the  aid  of 
equity. —  "  It  is  obvious  from  the  rule  that  the  circum- 
stances of  each  case  must  detennine  the  jurisdiction  of 
a  court  of  equity  to  give  the  relief  sought;  that  the 
pleadings  must  be  relied  upon  to  collect  what  they  are, 
to  ascertain  in  what  character  and  to  what  end  a  share- 
holder invokes  the  interposition  of  a  court  of  equity 
on  account  of  the  mismanagement  of  a  board  of  direct- 
ors; whether  such  acts  are  out  of  or  beyond  the  limits 
of  the  act  of  incoi-j^oration,  either  of  commission  con- 
trary thereto  or  of  negligence  in  not  doing  what  it  may 
be  their  chartered  duty  to  do."  ^^ 

In  Hawes  v.  Oakland,  the  Supreme  Court  of  the 
United  States  held  that,  in  order  to  entitle  a  stock- 
holder to  sue  in  behalf  of  the  corporation,  there  nmst 
bo  shown:  "  (1)  Some  action  or  threatened  action  of 
the  directors  or  trustees  which  is  beyond  the  arthority 
conferred  by  the  charter  or  the  law  under  which  the 
company  was  organized;  or  (2),  Such  a  fraudulent 
transaction,  completed  or  threatened  by  them,  either 
among  themselves  or  with  some  other  party,  or  Avith 
shareholders,  as  will  result  in  serious  injuiy  to  the  com- 
pany or  the  other  shareholders;  or  (3),  That  the  direct- 
ors, or  a  majority  of  them,  are  acting  for  their  OAvn 

52.  Dodfre  v.  Woolsey,  18  How.   (59  U.  S.)   331. 

53.  Idem. 


4 


shareholder's  rights  in  equity.  135 

interests  in  a  manner  destructive  of  the  company,  or 
the  rights  of  the  other  shareholders;  or  (4),  That  the 
majority  of  the  shareholders  are  oppressively  and  il- 
legally pursuing,  in  the  name  of  the  company,  a  course 
in  violation  of  the  rights  of  the  other  shareholders 
which  can  only  be  restrained  by  a  court  of  equity;  or 
(5),  It  must  also  be  made  to  appear  that-  the  complain- 
ant made  an  earnest  effort  to  obtain  redress  at  the  hands 
of  the  directors  and  shareholders  of  the  corporation, 
and  that  the  ownership  was  vested  in  him  at  the  time 
of  the  transactions  of  which  he  complains,  or  was  there- 
after transferred  to  him  by  operation  of  law."  ^'^ 

"  In  actions  by  stockholders,  which  assail  the  acts  of 
their  directors  or  tnistees,  courts  will  not  interfere  un- 
less the  powers  have  been  illegally  or  unconscientiously 
executed,  or  unless  it  be  made  to  appear  that  the  acts 
were  fraudulent  or  collusive  and  destructive  of  the 
rights  of  the  stockholders.  Mere  errors  of  judgment 
are  not  sufficient  as  grounds  for  equity  interference; 
for  the  powers  of  those  intrusted  with  corporate  man- 
agement are  largely  discretionary.^^ 

In  restraining  ultra  vires  acts  the  same  court  said: 
"  We  do  not  question  the  right  of  stockholders  to  com- 
plain of  any  diversion  of  the  capital  and  assets  to  pur- 
poses not  authorized  by  the  charter,  and  to  arrest  by 
suit  an  unauthorized  course  of  dealing  which  results 
in  such  diversion.  The  powers  of  a  court  of  equity 
may  be  put  in  motion  at  the  instance  of  a  single  share- 
holder, if  he  can  show  that  the  corjDoration  is  employ- 
ing its  statutory  powers  for  the  accomplishment  of 
pui'poses  not  within  the  scope  of  its  institution." 

The  aid  of  a  court  of  equity  may  not  therefore  be 
invoked  until  all  legal  remedies  have  been  exhausted, 

54.  104  U.  S.  450. 

55.  Leslie  v.   Lorillard,   110   N.  Y.   519.     See  also  Bronson  v. 
La  Crosse  Ry.  Co.,  2  Wall.   (69  U.  S.)   283. 


13G      SUMMARY    OF   LAW    OF    PRIVATE    CORPORATIONS. 

and  until  it  has  been  shown  that  the  proper  demand 
has  been  made  by  the  shareholder  to  the  corporation 
to  protect  itself  and  its  shareholders,  and  a  refusal 
made.^**  An  exception  will  be  made  to  this  rule,  how- 
ever, in  cases  where  the  officers  or  directors  of  the 
corporation  are  themselves  guilty  of  the  wrong  com- 
plained of,  in  which  case  equity  will  proceed  to  act 
without  requiring  the  demand  to  be  made.^^ 

The  coqjoration  is  an  indispensable  party  defendant 
in  such  cases.  The  reason  for  this  is  "  that  all  other 
possible  future  suits  by  the  corporation  are  thereby  pre- 
vented, the  rights  of  the  coi'iJoration  are  duly  ascer- 
tained, and  the  remedy  made  effectual  against  the 
corporation  as  well  as  others."  °^ 

§  loC.  Stockholder's  right  to  ask  for  the  appointment 
of  a  receiver. —  "  It  is  not  the  province  of  a  court  of 
equity  to  take  possession  of  the  property,  and  conduct 
the  business  of  corporations  or  individuals,  except  where 
the  exercise  of  such  extraordinary  jurisdiction  is  indis- 
pensably necessary  to  save  or  protect  some  clear  right 
of  a  suitor,  which  would  otherwise  be  lost  or  greatly  en- 
dangered, and  which  cannot  be  saved  or  protected  by 
any  other  action  or  mode  of  proceeding."  "^ 

The  instances  are  not  many  where  a  court  of  equity 
will  appoint  a  receiver  at  the  instance  of  a  stockholder, 
more  decisions  existing  where  the  courts  have  refused 
the  aid  asked  than  where  it  has  been  granted.  The 
mere  fact  that  stockholders  apprehend  exposure  in  the 
future,  or  that  the  corporation  is  not  prosperous,  or  that 
there  is  a  difference  of  opinion  as  to  the  policy  to  be 
pursued  in  running  the  business,  or  that  there  is  a  sus- 
picioTi  tlint  the  officers  are  not  honest  and  may  misappro- 

56.  Taylor  v.  Holmos,  127  U.  S.  489;  Dunphy  v.  Travelers,  etc., 
Assn.,   140  Mass.  4nr>. 

57.  ]\rora\vot7:.  §  380:    Rqnair  v.  Lookout.  Mt.  Co.,  42  Fed.  729. 

58.  Cook  on  Stockholders   (1st  ed.).  §  002. 

59.  Overton  v.  Memphis,  etc.,  Ry.  Co..   10  Fed.  86G. 


il 


LIABILITY    OF    MEMBERS.  137 

priate  funds  or  usurp  powers,  or  that  the  majority  are 
acting  without  regard  to  the  interests  of  the  minority  — 
none  of  these  are  grounds  for  a  receivership. 

But  a  receiver  will  be  appointed  where  there  are  such 
internal  dissensions  in  the  governing  body  of  the  cor- 
poration that  it  is  impossible  to  carry  on  the  business  of 
the  company  to  the  advantage  of  all  parties  interested.'''^ 

So,  too,  a  receiver  will  be  appointed  where  it  is  clear 
that  mismanagement  and  misappropriation  on  the  part 
of  the  corporate  officers  will  continue  unless  the  court 
interferes.^^ 

(c)  Liability  of  Members. 

§  137.  The  liability  of  a  member  or  shareholder  in 
a  corporation  is  embraced  uuder  one  or  more  of  the 
following:  (a)  Liability  to  the  corporation.  (&)  To 
the  other  shareholders,  (c)  To  creditors.  The  latter 
liability  may  be  subdivided  into  (1)  In  law;  (2)  in 
equity;  (3)  the  liability  to  creditors  under  statute. 

§  138.  Liability  to  the  corporation. —  This  subject  has 
already  been  treated  under  the  title  of  "Assessments 
and  Calls."  ®^  The  liability  rests  on  the  ordinary  lia- 
bility of  contract,  and  if  conditional,  the  conditions 
must  be  complied  with  before  the  contract  can  be  en- 
forced.'''^ It  is  important  to  remember  that  no  one 
can  be  made  a  shareholder  without  his  consent,  either 
express  or  implied.^'*  The  liability,  briefly  stated,  is  to 
take  and  pay  for  the  proportion  of  stock  subscribed  for, 
and  the  corporation  may  enforce  the  payment  of  the 
amounts  due  up  to  the  par  value  of  the  stock,  unless 

60.  Trade,  etc..  Co.  v.  Vickers.  L.  R.,  16  Eq.  303:  Tompkins 
Co.  V.  Catawba  Mills,  82  Fed.  780;  Sternberg  v.  Wolff,  .50  N.  J. 
Eq.  .555. 

61.  Stevens  v.  South  Ogden,  etc.,  Co.,  14  T'tah,  232;  Cameron 
V.  Groveland  Imp.  Co..  20  Wash.  169;  Aiken  v.  Colorado  River, 
etc..  Co..  72  Fed.  591 ;  Bridgeport,  etc..  Co.  v.  Tritseh,  110  Ala.  274. 

62.  See  p.  114. 

63.  Lake  Ontario  Rv.  Co.  v.  Curtiss,  80  N.  Y.  219. 

64.  Glenn  v.  Garth. "133  N.  Y.  18. 


138      SUMMAKY    OF   LAW   OF    PRIVATE   CORPORATIONS 

there  be  an  express  agreement  to  the  contrary,  and  the 
corporation  a  "•  going  concern." 

It  is  a  well-recognized  rule,  and  borne  out  by  weight 
of  authority,  that  if  a  stockholder  sell  his  stock  before 
the  full  amount  due  thereon  is  paid,  the  liability  to  pay 
the  same  is  transferred  to  the  transferee,  the  corpora- 
tion by  canceling  the  old  certificate  and  issuing  a  new 
one  in  its  place  having  waived  all  claims  on  the  original 
certificate.*'"' 

§  139.  The  liability  to  other  shareholders ■  Share- 
holders, as  a  rule,  owe  no  duty  to  other  shareholders, 
as  they  stand  in  no  fiduciary  relationship,  one  to  the 
other.  Their  liability  to  other  shareholders  rests 
upon  the  mutual  rights  and  obligations  with  respect 
to  the  contribution  of  the  capital.  As  a  general  rule 
this  liability  is  one  enforceable  by  the  corporation, 
though  in  certain  and  extreme  cases  one  shareholder, 
acting  for  himself  and  the  others,  may  compel  default- 
ing shareholders  to  contribute  an  amount  proportionate 
to  the  stock  subscribed  for. 

Every  share  of  stock  in  a  corporation  is  equal  in  all 
respects  to  every  other  share,  unless  otherwise  provided 
in  the  charter.  To  discriminate  between  shareholders 
is  to  relieve  one  at  the  expense  of  another.  Sound 
policy  and  justice  requires  that  where  one  enjoys  the 
privileges  of  membership,  he  must  also  bear  its  burdens, 
and  for  the  reason  that  the  profits  of  the  corporation 
must  be  divided  evenly  among  the  shareholders  in  pro- 
portion to  their  holdings,®^  so  every  shareholder  must 
contribute  a  proportionate  amount  of  the  capital. 

Accordingly,  every  shareholder  has  a  right  to  insist 
that  every  other  shareholder  shall  be  held  to  a  strict 
performance  of  Ids  obligations;  and  as  we  have  seen,  no 


65.  Tucker  v.  Oilman,   121   N.  Y.   189.     For  further  discussion 
of  this  subject,  see  Creditor's  Rights  and  Remedies,  chap.  X,  p.  199. 

66.  Jackson  v.  Newark,  etc.,  Co.,  31  N.  J.  L.  277. 


I 


LIABILITY    OF   MEMBERS.  139 

shareholder  can  rescind  or  cancel  his  contract  without 
the  consent  of  the  corporation  and  the  members  who 
compose  it.  This  liability  to  the  other  shareholders 
arises  in  cases  where  one  shareholder  comes  in  on  a 
more  favorable  basis  than  the  others,  as  in  the  matter  of 
secret  agTeements  between  the  shareholder  and  the  cor- 
poration, and  the  further  case  where  one  shareholder 
has  not  paid  the  amounts  due  upon  his  stock,  while  the 
others  have. 

Where  a  subscriber  allows  his  name  to  be  placed  on 
the  books  as  a  stockholder,  he  is  estopped  from  denying 
that  he  intended  to  become  a  shareholder,  and  any  secret 
agreements  between  the  agents  of  the  corporation  and 
the  subscriber  can  be  enforced  unconditionally,  for  the 
reason  that  such  an  agreement  would  be  a  fraud  on  the 
other  shareholders.^^  While  the  corporation  itself 
could  not  enforce,  being  a  party  to  the  agreement,^^  it 
is  unquestionably  true  that  the  shareholders  themselves, 
being  imaware  of  this  secret  agreement,  have  the  right 
to  enforce  the  subscription  as  an  unconditional  one, 
acting  themselves  or  through  a  receiver.  But  share- 
holders must  not  sleep  on  their  rights.®^ 

Agents  of  the  corporation,  soliciting  subscriptions, 
have  no  right  to  enter  into  agreements  with  subscribers 
on  special  terms,  whereby  the  subscriber  shall  come  in 
and  contribute  less  than  the  other  members,  or  receive 
a  preference  in  the  distribution  of  profits.  Such  a  sub- 
scription is  either  void  or  it  must  be  enforced  without 
regard  to  the  special  agreement.^^ 

§  140.  Forfeiture  of  shares —  A  corporation  has,  at 
common  law,  no  lien  on  the  shares  of  its  members  to 
secure  the  payment  of  calls,  hence  the  only  remedy  is 

67.  Melvin  v.  Lamar  Ins.  Co..  80  111.  446:   Hawley  v.  Upton, 
102  U.  S.  314. 

68.  Christensen  v.  Eno,  106  N.  Y.  97. 

69.  Melvin  v.  Lamar  Ins.  Co..  80  111.  446. 

70.  Idem.     See  also  Burke  v.  Smith,  16  Wall.    (8.3  U.  S.)    390. 


140      SUMMARY    OF    LAW    OF    TRIVATE    COKPOKATIONS. 

an  action  at  law  in  the  name  of  the  corporation  to  com- 
pel the  payment.  i!^o  authority  on  the  part  of  the  cor- 
poration exists  whereby  it  can  forfeit  the  shares  of  the 
delinquent  member,  unless  there  be  an  express  grant 
of  authority,  either  in  the  charter  or  in  the  general  laws 
under  which  the  corporation  was  organized."^  If  this 
power  exists,  it  must  bo  exercised  fairly  and  without 
discrimination  either  to  the  other  shareholders  or  the 
delinquent  shareholder.  It  cannot  be  exercised  in  such 
a  way  as  to  allow  the  shareholder  to  escape  liability  to 
creditors,  for  this  would  amount  to  a  fraud  upon  the 
continuing  shareholders.'" 

§  141.  "Paid-up"  shares. — A  person  who  innocently 
purchases  such  shares,  the  corporation  having  issued 
them  treating  them  as  such,  and  stating  in  the  certificate 
that  they  are  "  paid-up,"  will  not  be  charged  with  a 
liability  for  the  falseness  of  the  corporation's  position. 
Having  used  the  ordinary  caution  of  a  business  man, 
he  is  not  required  to  suspect  fraud  and  institute  in- 
quiries, when  there  is  no  ground  for  such  suspicion.'" 
Of  course  if  he  takes  with  notice,  he  will  be  chargeable. 

It  is  self-evident  that  if  shares  having  once  been 
fully  paid  are  transferred  back  to  the  corporation,  they 
may  be  sold  by  the  corporation  at  their  actual  or  market 
value,  without  incurring  any  liability  eithor  to  share- 
holders or  creditors. 

Liability  to  Creditors. 
§  142.  At  common  law. —  It  is  a  general  rule  of  law 
that  shareholders  are  not  liable  to  creditors  for  the  debts 
or  torts  of  the  corporation,  unless  made  so  by  statute  or 
Constitution,  or  unless  they  agree,  upon  becoming  share- 
holders,  to   assume   a  larger  liability.'^'*     In    all   cases, 

71.  Porrin  v.  Granf3;er,  30  Vt.  .595. 

72.  Stanhope's  Case.  L.  R.,  1  Ch.  App.   101. 

73.  Phelan  v.  Hazard.  5  Dill.   (U.  S.  C.)   45. 

74.  Jackson  v.  Meek,  87  Tenn.  G9;  Toner  v.  Fulkerson,  125  Tnd. 
224. 


LIABILITY    OF    MEMBEKS.  141 

however,  the  shareholder  is  liable  to  pay  to  the  corpora- 
tion -whatever  remains  unpaid  upon  his  shares  at  their 
par  value  for  the  benefit  of  the  creditors  of  the  corpora- 
tion, and  this  may  be  enforced  in  one  of  several  ways, 
and  if  not  at  law  equity  will  enforce  it. 

Exceptions  to  this  rule  will  be  found  in  favor  of  a 
bona  fide  purchaser,  M'ho,  in  good  faith,  has  bought 
shares  of  a  corporation,  believing  them  to  be  paid  up, 
and  the  corporation  has  issued  them  as  paid  up  f^  and 
the  same  is  true  of  a  pledgee  of  the  corporation  who 
holds  shares  as  collateral  security  for  money  advanced 
to  the  corjDorationJ^  The  pledgee  of  a  shareholder, 
being  an  equitable  holder  only,  will  not  be  held  liable 
on  the  shares  unless  he  has  reduced  the  shares  to  his  pos- 
session by  transfer  on  the  books."^  Shareholders  are 
not  liable  for  the  tiUra  vires  acts  of  the  corporation, 
and  cannot  be  held  for  them.  But  it  has  been  held  that 
they  are  liable  as  partners  in  cases  where  the  corporation 
was  illegally  formed,  or  where  the  corporation  was  pro- 
hibited either  by  law  or  public  policy ,''^^  the  reason  given 
being  that  individuals  cannot  use  an  incorporation  as  a 
cloak  to  cover  transactions  of  this  nature.  They  are,  of 
course,  liable  for  their  o\vn  frauds  as  shareholders.'*^ 

§  143.  In  equity. —  From  the  above  statement  it  is 
evident  that  the  only  recourse  of  creditors  at  law  is  to 
reach  the  tangible  assets  of  the  corporation  by  execu- 
tion. If  the  assets  have  been  put  beyond  execution  by 
secret  agreements,  fraudulent  transfers,  or  conceal- 
ments, then  equity  may  be  invoked  and  its  aid  will  be 
extended  to  the  creditors  as  against  the  corporation,  and 
in  certain  instances  against  the  shareholders.  It  is  a 
general  rule,  however,  that  equity  will  aid  only  after  all 
legal  remedies  have  been  exhausted,  and  in  seeking  the 

75.  See  Thompson  on  Stockholders,  §  135. 

76.  Fisher  v.  Seligman,  7  Mo.  App.  383. 

77.  Crease  v.  Babcock,  10  Mete.   (Mass.)   525. 

78.  See  3  Thompson,  §§  2940.  2941.  and  cases  cited. 

79.  Whitwell  v.  Warner.  20  Vt.  425. 


142      SUMMAKY    OF   LAW    OF    PRIVATE    CORPORATIONS. 

aid  of  a  court  of  equity  the  creditors  generally  have  to 
aver  that  they  have  proceeded  at  law,  and  that  an  execu- 
tion has  been  returned  unsatisfied. 

Shareholders  can  be  reached  in  equity  only  under 
two  conditions:  (1)  Where  the  capital  has  been  sub- 
scribed for,  but  not  paid  in;  (2)  where  the  capital  has 
been  paid  in  and  improperly  divided  among  the  share- 
holders or  otherwise  diverted  from  their  proper  func- 
tion of  paying  corporate  debts. 

§  144.  The  trust  fund  theory. —  It  is  a  favorite  doc- 
trine, invented  by  Justice  Story,  of  the  United  States 
Supreme  Court ,^°  that  the  property  of  a  corporation  is 
a  trust  fund  for  the  payment  of  the  debts  of  the  cor- 
poration in  preference  to  the  stockholders.  For  many 
years  this  theory  obtained  in  the  majority  of  jurisdic- 
tions in  the  United  States,  but  of  late  years  has  been 
qualified,  and  in  one  or  two  jurisdictions  seems  to  have 
been  lost  sight  of  altogether.  A  leading  case  in  the 
United  States  Supreme  Court  held  that  a  subscriber 
to  the  shares  of  a  corporation  could  be  compelled  to  pay, 
if  necessary  to  liquidate  its  debts,  the  entire  par  value 
of  his  shares,  no  matter  what  agreement  he  may  have 
made  with  the  corporation  in  respect  to  the  amount  to 
be  paid  therefor  at  the  time  of  his  subscription.*^  This 
rule  received  some  qualification  in  a  much  later  case  of 
the  same  court :  "  It  is  the  settled  doctrine  of  this  court 
that  the  trust  arising  in  favor  of  creditors  by  subscrip- 
tions to  the  stock  of  a  corporation  cannot  be  defeated 
by  any  simulated  payment  of  such  subscription,  nor 
by  any  device  short  of  an  actual  payment  in  good  faith. 
And  while  any  settlement  or  satisfaction  of  such  sub- 
scription may  be  good  as  between  the  corporation  and 
the  stockholders,  it  is  unavailing  as  against  the  claim 
of  creditors.  JSTothing  that  was  said  in  the  recent  eases 
of  aark  V.  Bever,  139  U.  S.  9G;  Fogg  v.  Blair,  id.  118; 

80.  See  Wood  v.  Dummer.  3  Mason   (U.  S.  C.),308. 

81.  Upton  V.  Tribilcock,  91  U.  S.  45. 


LIABILITY    OF    MEMBERS.  143 

or  Ilandley  v.  Stutz,  id.  417,  was  intended  to  overi-ule 
or  qualify  in  any  way  the  wholesome  principle  adopted 
by  this  court  in  the  earlier  cases,  especially  as  applied  to 
the  original  subscribers  to  stock.  The  later  cases  were 
only  intended  to  draw  a  line  beyond  which  the  court 
was  unwilling  to  go  in  affixing  a  liability  upon  those 
who  had  purchased  the  stock  of  a  corporation,  or  had 
taken  it  in  good  faith  in  satisfaction  of  their  de- 
mands." ^^  This  means,  in  the  language  of  Mr.  Thomp- 
son, "  that  except  in  cases  where  creditors  have  been 
deceived  and  misled  by  the  corporation  pretending  to 
have  a  capital  which  it  has  not,  a  creditor  can  en- 
force no  right  as  against  a  shareholder  gTeater  than  the 
corporation  itself  could  enforce  against  him."  ^^ 

The  entire  theory  has  been  impugTied  by  a  State 
court  which  would  allow  a  corporation,  in  contem- 
plation of  insolvency  to   prefer  particular   creditors. ^^ 

§   145.  Relief  when  stock  is  not  paid  in "  The  rights 

of  creditors  being  superior,  and  partaiking  somewhat  of 
the  character  of  a  lien,  equity  will  regard  and  work 
them  out  by  the  same  means  the  cor|Doration  itself 
should  have  done."^'* 

This  aid  will  be  extended  only  where  the  creditors 
are  unable  to  obtain  satisfaction  by  legal  methods,  un- 
der which  circumstances,  if  any  of  the  stockholders  are 
indebted  to  the  corporation  on  account  of  their  sub- 
scriptions to  the  capital  stock,  and  the  board  of  direct- 
ors fail  or  refuse  to  raise  the  money  to  pay  the  debts 
by  enforcing  the  delinquent  shareholders  to  make  pay- 
ment, equity  will  either  compel  the  directors  to  per- 
form this  duty  or  perform  it  by  its  own  proper 
officers.^'^ 

82.  Camden  v.  Stuart.  144  U.  S.  104. 

83.  3  Thompson,  §  2953. 

84.  Hospes  v.  Northwestern  Mfg.  Co..  48  Minn.  174. 

85.  Adler  v.  Milwaukee,  etc.,  Co.,  13  Wis.  63. 

86.  Idem;  Ward  v.  Griswoldville,  etc.,  Co.,  IG  Conn.  597.     See 
also  Slee  v.  Bloom,  19  Johns.  Ch.  456. 


144      SUMMAUY    OF    LAW    OF    FlUVATE    COKPOKATIO^^S. 

§  14(;.  Relief  when  stock  is  improperly  withdrawn  or 
divided. —  Wlicre  dividends  have  been  properly  paid 
from  profits,  the  company  being  solvent  at  the  time,  its 
subsequent  insolvency  will  not  make  the  shareholders 
liable  to  creditors  for  the  dividends  so  received.**^ 

But  a  division  of  assets  at  a  time  when  the  corpora- 
tion was  insolvent,  or  contemplating  insolvency,  would 
plainly  be  -an  injury  to  the  creditors,  and  it  may  not 
only^  be  restrained,  but  if  paid  to  shareholders,  may 
be  recovered  back.^^ 

So  the  shareholders  of  an  insolvent  bank  are  not 
entitled  to  receive  or  divide  among  themselves  any  of 
its  assets  until  its  debts  and  liabilities  are  fully  dis- 
charged.^^ An  action  may  be  maintained  by  the 
receiver  of  an  insolvent  corjjoration  against  its  share- 
holders to  recover  sums  received  by  them  as  dividends 
where  the  corporation  was  insolvent.^*' 

§  14:7.  Statutory  liability. —  Much  discussion  has  been 
indulged  in  with  reference  to  this  liability  and  its  re- 
semblance to  the  liability  of  partners  and  guarantors. 
That  it  resembles  cither  one  or  the  other  is  of  little 
moment.  It  is  created  by  and  depends  upon  statute, 
and  if  a  fair  construction  of  the  particular  statute 
seems  to  approach  to  the  liability  of  either  one  or  the 
other  in  particular  instances,  it  by  no  means  follows 
that  the  general  liability  of  a  partner  or  guarantor  is 
created. 

§  148.  Parties  to  the  action. —  "  The  individual  lia- 
bility of  stockholders  in  a  corporation  is  always  a 
creature  of  statute.  It  does  not  exist  at  common  law. 
The  first  thing  to  be  determined  in  all  such  cases  is 
therefore  what  liability  has  been  created.  There  will 
always  be  difficulty  in   attempting  to  reconcile  cases 

87.  Reid  v.  Eatonton  Mfg.  Co..  40  Ga.  98. 

88.  Bartlett  v.  Drew,  .57  N.  Y.  587. 

89.  Wood  V.  Dummer,  3  Mason   (U.  S.  C.),308. 

90.  Williams  v.  Boice,  38  N.  J.  Eq.  3G4. 


I 


LIABILITY    OF    MEMBEKS.  145 

of  this  class  in  which  the  general  question  of  remedy 
has  arisen,  unless  special  attention  is  given  to  the  pre- 
cise language  of  the  statute  under  consideration.  The 
remedy  must  always  be  such  as  is  appropriate  to  the 
liability  to  be  enforced.  The  statute  which  creates 
the  liability  may  declare  the  purpose  of  its  creation 
and  provide  directly  or  indirectly  a  remedy  for  its  en- 
forcement. If  the  object  is  to  provide  a  fund  out  of 
which  all  creditors  are  to  be  paid,  share  and  share 
alike,  it  needs  no  argument  to  show  that  one  creditor 
should  not  be  pennitted  to  appropriate  to  himself, 
without  regard  to  the  rights  of  others,  that  which  is  to 
make  up  the  fund."  ^^ 

From  this  it  may  be  gathered  that  the  distinction  as 
to  whether  one  creditor  may  sue  or  all  must  join  in 
the  action  will  depend  upon  the  language  of  the  stat- 
ute. If  the  shareholders  are  made  severally  and  in- 
dividually liable  to  the  creditors  directly,  one  creditor 
may  sue  a  single  shareholder,  and  at  law.  If  the  stat- 
ute directly  or  impliedly  provides  for  a  proportionate 
liability  by  all  stockholders,  by  which  a  fund  is  cre- 
ated out  of  which  all  creditors  are  to  be  paid  alike, 
then  the  liability  must  be  enforced  by  all  the  creditors, 
or  by  one  for  the  benefit  of  all,  and  all  shareholders 
should  be  made  defendants. 

§  140.  The  liability  a  contractual  one — The  liability 
imposed  by  statute  is,  in  most  cases,  an  absolute  obli- 
gation to  pay  and  is  generally  held  to  be  contractual.^^ 
As  such  it  has  been  held  to  survive  and  may  be  en- 
forced against  the  personal  representatives  of  the  de- 
ceased shareholder.^^  If,  however,  the  liability  be  a 
contingent  one,  accruing  only  upon  the  nonperformance 
of  certain  prescribed   duties,   it   will  be   penal  in   its 

91.  Terry  v.  Little,  101  U.  S.  216. 

92.  Lowry  y.  Inman,  46  N.  Y.  119;  Paine  v.  Stewart.  30  Conn. 
516;  Bond  v.  Appleton,  8  Mass.  472;  Aultman's  Appeal,  98  Pa. 
St.  505. 

93.  Cochran  v.  Weichers,  119  N.  Y.  399. 

10 


14G      SUMMARY    OF    LAW    OF    PRIVATE    CORPORATIONS. 

nature  and  does  not  sun'ive.  Such  a  liability  would 
be  one  making  the  directors  liable  for  failure  to  file 
the  annual  rejjort. 

§  150.  "Debts"  under  the  statutes. —  The  general 
view  is  that  the  word  "  debt "  is  confined  solely  to  de- 
mands founded  upon  contract,  and  is  not  to  be  extended 
to  include  claims  arising  from  torts.  There  are  sev- 
eral jurisdictions  which  hold  to  the  contrary,  however, 
and  insist  that  the  words  include  any  just  demand 
against  the  corporation  and  will  include  a  claim  for 
damages  sounding  in  tort.^^ 

§  151.  Mode  of  enforcing  the  liability. —  The  manner 
of  enforcing  the  liability  against  the  shareholders  will 
depend  to  a  certain  extent  upon  the  statute.  Statutes 
usually  provide  that  the  creditor  must  exhaust  all  reme- 
dies at  law  and  against  the  corporation,  secure  a  judg- 
ment and  have  the  same  returned  unsatisfied  before 
he  may  go  against  the  shareholder.  If  he  is  not  able 
to  secure  a  judgment  he  cannot  proceed  against  the 
shareholder  at  all.^^  Where  the  statute  does  not  re- 
quire a  judgment  against  the  corporation,  the  necessity 
for  it  will  depend  upon  the  peculiar  liability  wdiich  at- 
taches by  virtue  of  the  statute.  If  the  statute  makes 
the  shareholder  primarily  liable  no  judgment  against 
the  corporation  is  necessary;  but  if  the  liability  is  sec- 
ondary only,  legal  remedies  against  the  corporation 
must  first  be  exhausted  before  the  creditor  may  proceed 
against  the  shareholder.  In  other  words,  judgment 
must  first  be  obtained  against  the  corporation  and  exe- 
cution thereon  returned  unsatisfied. 

§  152.  What  shareholders  are  liable. —  Three  distinct 
views  exist  as  to  what  shareholders  are  liable.    (1)  Only 

94.  Child  V.  Boston,  etc.,  Co.,  137  Mass.  516;  Bohn  v.  Brown, 
33  Mich.  257;  Doolittle  v.  Marsh,  11  Nebr.  243;  Cook  on  Stock- 
holders, §  220.  Contra,  Losee  v.  Bullerd,  79  N.  Y.  404;  Carver  v. 
Baintree  Mfg.  Co.,  2  Story  (U.  S.  C),  432;  Rider  v.  Fritchey,  49 
Ohio  St.  285. 

95.  Fourth  Nat.  Bank  v.  Francklyn,  120  U.  S.  747. 


LIABILITY    OF   MEMBERS.  147 

those  shareholders  are  liable  who  were  such  when  the 
debt  was  contracted,  and  while  transfer  will  release 
them  from  debts  subsequently  incurred,  it  will  not  have 
that  effect  upon  those  incurred  during  membership  ;^^ 

(2)  that  only  those  shareholders  are  liable  w^ho  were 
such  at  the  time  of  the  commencement  of  the  action  ;^^ 

(3)  all  shareholders  who  were  such  either  at  the  time 
the  debt  was  contracted  or  who  became  such  prior  to 
the  commencement  of  the  action. ^^  A  review  of  the 
earlier  cases  will  show  the  subject  to  be  in  some  con- 
fusion, all  three  views  having  obtained  at  different 
times  in  the  same  jurisdiction.  This  is  accounted  for, 
however,  by  the  changes  through  which  the  statutes 
have  gone  and  allowance  must  also  be  made  for  the 
variation  in  the  form  and  language  of  the  statute  im- 
posing the  liability.  As  to  who  is  or  is  not  a  share- 
holder, the  rules  already  stated  will  govern.^^ 

§  153.  Effect  of  a  repeal  of  the  statute. —  A  repeal  or 
abrogation  of  an  existing  statutory  or  constitutional 
provision  imposing  a  contractual  liability  upon  the 
shareholders  of  a  corporation  to  its  creditors  is,  as 
against  the  creditors  whose  claims  accrued  while  such 
provision  was  in  force,  invalid  as  an  attempted  impair- 
ment of  contract.-^  When  a  shareholder  in  a  corpora- 
tion who  has  assented  to  an  increase  of  stock  and  its 
gratuitous  distribution  among  the  shareholders,  re- 
ceives such  stock  as  full  paid,  an  obligation  arises  to 
pay  for  it  in  full  when  called  upon  to  do  so  by  creditors 
whose  debts  are  subsequent  to  the  increase.  This  rule 
has  no  effect  if  the  debts  were  contracted  prior  to  the 


96.  Williams   v.   Hanna.    40   Ind.   535;    Chesley  v.   Pierce,    32 
N.  H.  388. 

97.  Middleton  Bank  v.  Magill.  5  Conn.  28. 

98.  Root  V.  Sinnock,  120  111.  350. 

99.  See  ante,  p.  98. 

1.  Hawthorne  v.  Calef,  69  U.  S.  10. 

2.  Handley  v.  Stutz,  139  U.  S.  417. 


148    8ummaky  of  law  of  pkivate  corpokations. 

Set-Off  by  Siiakeholders. 

§  154.  Against  unpaid  subscriptions. — A  stockholder 
who  is  also  a  creditor  of  the  corporation  has  no  right 
to  set-off  as  against  his  unpaid  subscription,  after  the 
corporation  has  become  insolvent,  and  a  suit  in  equity 
has  been  brought  to  wind  up  its  affairs  and  distribute 
its  assets.  The  unpaid  stocik  is  held  to  be  a  trust  fund 
for  the  purpose  of  paying  the  debts  of  the  corporation, 
and  as  such  it  must  be  distributed  among  the  creditors 
pro  rata.  The  debt  due  a  stockholder  is  entitled  to 
no  preference  over  other  debts,  and  he  cannot  require 
its  payment  by  way  of  set-off,  to  the  exclusion  or  post- 
ponement of  other  claims.  The  reason  usually  assigned 
for  this  rule  is  that  the  debts  owing  by  the  stockholders 
to  the  cori:)oration  after  insolvency  and  that  owing  from 
the  corporation  to  him  are  not  in  the  same  right,  the 
former  being  a  debt  owing  to  a  trust  fund."  ^ 

§  155.  Under  statutory  liability. —  Two  views  exist 
here  —  the  one  holding  that  where  the  statute  creating 
the  liability  is  personal  and  several,  and  action  may  be 
brought  by  any  creditor  against  any  shareholder,  the 
shareholder  may  set  off  debts  due  him  from  the  com- 
pany.* 

On  the  other  hand,  if  the  statute  creating  the  liability 
contemplates  that  it  shall  be  a  fund  for  the  payment 
of  creditors  ratably,  then  the  right  to  set-off  is  denied, 
and  the  shareholder  must  pay  his  proportion  and  look 
to  the  funds  thus  created  for  the  satisfaction  of  his 
debt.* 

3.  Bausman  v.  Kinnear,  79  Fed.  172;  Scoville  v.  Thayer,  105 
U.  S.  143;  Lawrence  v.  Nelson,  21  N.  Y.  158;  Long  v.  Ponn.  Ins. 
Co.,  6  Pa.  St.  421. 

4.  Wells  V.  Stout,  38  Fed.  807;  Wheeler  v.  Millar.  90  N.  Y. 
353;  Pondville  Co.  v.  Clark,  25  Conn.  97. 

5.  Witters  v.  Sowles.  32  Fed.  130;  Ball  Electric  Light  Co.  v. 
Child,  68  Conn.  522;  Thebus  v.  Smiley,  110  111.  310;  Barnes  v. 
Trevor,  45  App.  Div.  (N.  Y.)  314. 


CHAPTER  VIII. 

Management. 

§  156.  In  general. — One  of  the  important  distinctions 
between  a  corporation  and  a  partnership  is  that  in  the 
latter  each  partner  is  the  agent  of  the  partnership  and 
of  each  other  with  power  to  bind  either  or  both  within 
the  scope  of  the  partnership  business,  while  in  the 
former,  no  one  shareholder  has  any  such  power.  The 
management  of  the  corporation  belongs  to  the  share- 
holders collectively,  and  from  them,  as  a  constituted 
body,  must  come  the  authority  to  manage  and  direct 
its  affairs.  This  is  usually  done  by  the  election  of 
directors  and  other  officers  and  agents,  who  represent 
and  act  for  the  corporation,  and  these  directors,  officers 
and  agents  are  not  only  responsible  to,  but  subject  to 
the  control  of,  the  shareholders.  The  delegation  of 
authority  to  a  board  of  directors  is  usually  regarded 
as  a  delegation  of  general  authority  to  exercise  all  the 
corporate  powers  which  relate  to  the  ordinary  business 
of  the  corporation,  but  by  no  means  vests  all  the  author- 
ity in  them,  for  extraordinary  and  unusual  powers  still 
remain  in  the  shareholders,  and  must  be  exercised  by 
them.^  Statute  or  charter,  or  both,  may  provide  for  and 
define  the  scheme  of  management  and  outline  the  au- 
thority and  duties  of  the  managing  agents,  in  which 
case  they  cannot  be  interfered  with  or  controlled  by  thy 
shareholders.  In  the  absence  of  these  limitations,  the 
shareholders  control,  and  the  usual  method  of  proced- 
ure is  for  the  shareholders  to  elect  a  board  of  directors 
whose  duties  and  powers  may  bo  outlined,  defined  and 

1.  Metropolitan,  etc..  Rv.  Co.  v.  Manhattan,  etc..  Rv.  Co.,  11 
Daly   (N.  Y.).  373. 

[149] 


150      SUMMAKY    OF   LAW    OF    TiUVATE   CORPORATIONS. 

limited  through  by-laws  adopted  by  the  shareholders. 
In  the  absence  of  by-laws  or  statutory  limitation,  it  is 
a  general  rule  that  wlien  once  the  authority  has  been 
delegated  to  a  board  of  directors,  the  directors  may  do 
all  that  the  shareholders  could  do.  Generally,  the 
above  statement  will  apply,  viz.,  that  directors  have 
**  the  authority  to  exercise  all  the  coi-porate  powers 
which  relate  to  the  ordinary  business  of  the  corpora- 
tion," while  the  extraordinary  or  unusual  powers  must 
be  exercised  by  the  shareholders.  Such  unusual  powers 
may  include  the  conveying,  leasing  and  mortgaging  of 
the  property;  incre-asing  or  diminishing  the  capital 
stocik;  authorizing  amendments  or  alterations  to  the 
charter;  the  adoption  of  by-laws  and  the  surrender  of 
the  charter  or  the  dissolution  of  the  corporation; 
though,  as  already  stated,  one  or  all  of  these  extraor- 
dinary powers  may  be  given  to  the  directors  by  statute 
or  charter. 

''  A  corporation  is  not  a  copartnership  where  mem- 
bers can  make  an  agreement  between  themselves  in- 
formally, but  it  must  act  as  a  corporate  body;  and  as 
corporations  are  now  so  numerous  in  all  l)ranohes  of 
business  we  deem  it  highly  important  to  require  regu- 
larity and  certainty  in  their  proceedings,  so  far  as 
mutual  rights  of  stockholders  arc  reqiured."  "  From 
this  statement  it  may  be  concluded  that  the  powers  of 
the  shareholders  must  be  exerted  collectively,  and  at 
a  meeting  called  and  conducted  according  to  law.  In- 
dividual acts  of  shareholders,  even  though  expressed 
in  writing,  will  not  suffice,^  unless  the  statutes  provide 
for  such  action. 

§157.  Corporate  meeting's.- — Provision  is  usually 
made  in  statute,  charter  or  by-laws  for  the  calling 
of  corporate  meetings,  and  these  provisions  are  man- 

2.  Dennis  v.  .Toslin  Co..  10  P..   T.  666. 

3.  Com.  V.  Tnllon.  13  Pa.  St.  133. 


COEPORATE  MEETINGS.  151 

datorj  in  their  nature^  and  must  be  complied  with,* 
though  it  seems  that  irregularities  in  calling,  or 
failure  to  comply  with  express  provisions  will  not 
render  the  meeting  illegal,  provided  all  sharehold- 
ers be  present,  or  subsequently  ratify  the  actions 
taken.^  In  the  absence  of  such  express  provisions  the 
meeting  must  be  called  by  some  person  or  persons  hav- 
ing competent  authority.  The  directors  have  this 
authority  when  it  is  deemed  advisable,  and  it  has  been 
held  that  the  officer  or  general  agent  intrusted  with 
the  management  of  the  coq^oration  may  call,  but  sub- 
ordinate officers  or  agents  have  no  such  authority.^ 

When  charter  or  by-laws  provide  that  a  meeting  may 
be  called  upon  the  application  of  a  certain  number  of 
shareholders,  and  the  officers  refuse  to  make  such  call, 
they  may  be  compelled  by  mandamus.^ 

§  158.  Notice. —  The  object  of  a  meeting  of  share- 
holders is  to  enable  all  to  consult  and  deliberate,  and 
for  this  reason  all  shareholders  are  entitled  to  be  pres- 
ent and  have  a  hearing.  To  bring  this  about  every 
shareholder  is  entitled  to  a  notice  of  the  meeting,  other- 
wise the  transactions  of  the  meeting  are  not  binding  as 
corporate  acts.^  The  notice  must  contain  the  exact 
time  and  place  of  the  meeting,  and,  in  case  of  a  special 
meeting,  must  state  the  nature  of  the  business  to  be 
transacted.  If  a  special  meeting,  only  such  business 
may  be  transacted  as  stated  in  the  notice  and  call;  if 
a  general  meeting,  all  business  incident  to  the  general 
corporate  interests  may  be  transacted. 

Usually,  the  charter  or  by-laws  state  the  time  and 
place  of  meetings,  and  in  such  a  case  shareholders,  be- 
ing deemed  familiar  with  both,  are  not  entitled  to  any 

4.  StevPTis  V.  Eden,  etc.,  Societv.  12  Vt.  688. 

5.  Benhow  v.  Conk.  115  X.  C.  324. 

6.  Rtebbins  v.  Merritt.  10  Cuish.   (Mass.)   27. 

7.  People  V.  Ciimminsrs.  72  IST.  Y.  43.3. 

8.  People  V.  Batchelor,  22  N.  Y.  128. 


152      SUMMARY    OF   LAW   OF    PRIVATE   CORPORATIONS. 

Other  notice  as  a  matter  of  right.  Notice  may  be 
waived,  under  conditions  stated  above,  under  irregu- 
larity as  to  calls. 

§  159.  Time. —  In  the  absence  of  express  provi- 
sions as  to  the  time  of  calling  a  shareholders'  meet- 
ing, there  is  no  definite  rule,  save  that  it  must  be  ap- 
pointed at  such  a  time  as  to  let  the  shareholders  have 
reasonable  notice  of  the  meeting.  The  fact  that  the 
by-laws  state  the  number  of  yearly  meetings  of  the 
shareholders  does  not  preclude  meetings  at  other  times, 
due  notice  having  been  given.^ 

§  160.  Place. — A  cor])oration  has  no  legal  existence 
outside  of  the  limits  of  tlio  State  in  which  it  was  cre- 
ated, and  it  is  a  general  rule  that  no  corporate  meeting 
can  be  held  outside  of  that  State. 

This  general  rule  has  been  qualified  by  the  courts  at 
times,-  and  perhaps  a  better  rule  would  be  that  transac- 
tions affecting  the  corporate  existence  of  the  corpora- 
tion, and  which  are  the  direct  acts  of  the  corporation, 
must  be  done  within  the  limits  of  the  State  of  its  crea- 
tion.^°  Such  transactions  might  be  the  first  meeting, 
the  election  of  directors,  increasing  or  decreasing  capi- 
tal stock,  transferring  or  mortgaging  property,  passing 
of  by-laws  and  winding-up.  There  is  nothing  to  pre- 
vent a  directors'  meeting  from  being  held  outside  of  the 
State,  as  the  acts  of  the  agents  of  the  corporation  nuist 
be  distinguished  from  those  acts  of  the  corporation. 

Where  a  corporation  created  by  one  State  has  be- 
come a  corporation  of  one  or  more  other  States,  un- 
der provisions  in  statutes  of  the  various  States,  one 
corporate  meeting  in  any  one  of  the  States  will  be 
deemed  sufficient,  and  the  transactions  of  that  one 
meeting  declared  effective  generally.     In  other  words, 

9.  Boaidslev  v.  Johnson.  121   K  Y.  224. 

10.  ^filler  V.  Ewer.  27  Mo.  oOO :  Craig  Co.  v.  Smith,  10.3  Mass. 
2(12:  Hilles  v.  Parrish.  14  N.  J.  Eq.  .380;  Ormsby  v.  Vermont,  etc.. 
Co.,  .50  N.  Y.  623. 


POWER   OF    THE    MAJORITY.  153 

it  is  not  reasonable  to  ask  that  the  corporation  hold 
a  separate  meeting  in  each  State  in  order  to  make  the 
transactions  valid  within  that  State.^^ 

Several  of  the  States  now  expressly  provide  in  their 
general  laws  that  meetings  may  be  held  outside  of  the 
State. 

The  conduct  of  the  meetings  is  usually  regulated 
through  by-laws.  In  their  absence  there  is  no  pre- 
scribed method  to  be  followed,  the  presumption  being 
that  the  meeting. was  regularly  called  and  properly 
conducted,  in  the  absence  of  proof  to  the  contrary.^^ 
Unless  otherwise  prescribed  a  majority  of  sharehold- 
ers present  will  constitute  a  quorum,  and  may  transact 
business.^^  This  is  not  true  of  a  Ijoard  of  directors, 
however,  as  a  majority  of  them  must  be  present  to 
make  up  a  quorum. 

The  method  of  voting  and  the  right  of  a  shareholder 
to  vote  has  already  been  spoken  of  in  a  previous 
chapter.^'* 

§  161.  The  power  of  the  majority.-^  "  We  suppose  it 
may  be  stated  as  an  indisputable  proposition,  that  every 
person  who  becomes  a  member  of  a  corporation  ag- 
gregate by  purchasing  and  holding  shares  agrees  by 
necessary  implication  that  he  will  be  bound  by  all  acts 
and  proceedings,  within  the  scope  of  the  powers  and 
authority  conferred  by  the  charter,  which  shall  be 
adopted  or  sanctioned  by  a  vote  of  the  majority  of  the 
corporation,  duly  taken  and  ascertained  according  to 
law.  This  is  the  unavoidable  result  of  the  funda- 
mental principle  that  the  majority  of  the  stockholders 
can  regulate  and  control  the  lawful  exercise  of  the 
powers  conferred  on  a  corporation  by  its  charter.      A 

11.  Graham  v.  Boston,  etc..  Rv.  Co..  118  U.  S.  161. 

12.  Wallace  v.  Inhabitants,  etc..  in  Townsend.  109  Mass.  263. 

13.  Morrill  v.  Little  Falls  IMfg.  Co..  5.3  Minn.  371;   Re  Rapid 
Transit  Ferry  Co.,  15  App.  Div.   (N.  Y.)   531. 

14.  See  Voting,  etc..  chap.  VII,  p.  118. 


15-i      SUMMAKY    OF    LAW   OF    PKIVATE   COEPORATIONS. 

holder  of  shares  in  an  incorporated  body,  so  far  as 
his  individual  rights  and  interests  may  be  involved  ^n 
the  doings  of  the  corporation,  acting  within  the  legiti- 
mate sphere  of  its  corporate  power,  has  no  other  legal 
control  over  them  than  that  which  he  can  exercise 
by  his  single  vote  in  the  meetings  of  the  company. 
To  this  extent  he  has  parted  with  his  personal  i-ight 
or  privilege  to  regulate  the  disposition  of  that  portion 
of  his  property  which  he  has  invested  in  the  capital 
stock  of  the  corporation,  and  surrendered  it  to  the  will 
of  a  majority  of  his  fellow  coi-porators.  The  jus  dis- 
ponendi  is  vested  in  them  so  long  as  they  keep  within 
the  line  of  the  general  purpose  and  object  for  which 
the  corporation  was  established,  although  their  action 
may  be  against  the  will  of  a  minority,  however  large. 
It  cannot  therefore  be  justly  said  that  the  contract, 
express  or  implied,  between  the  corporation  and  the 
stockholders  is  infringed  or  impaired  by  any  act  or 
proceeding  of  the  former  which  is  authorized  by  a 
majority,  and  which  comes  within  the  terms  of  the 
original  statute  creating  and  establishing  their  fran- 
chise, and  conferring  on  them  capacity  to  exercise  con- 
trol over  the  rights  and  property  of  their  members. 
On  the  contrary,  the  fair  and  reasonable  implication 
resulting  from  the  legal  relation  of  the  stockholder 
and  the  coi-poration  is,  that  the  majority  may  do  any 
act  either  coming  within  the  scope  of  the  corporate 
authority,  or  which  is  consistent  with  the  terms  and 
conditions  of  the  original  charter,  without  and  even 
against  the  consent  of  an  individual  member."  ^"^ 

"  Each  and  every  stockholder  contracts  that  the  will 
of  the  majority  shall  govern  in  all  matters  coming 
within  the  limits  of  the  act  of  incorporation  ;  and  in 
all  cases  involving  no  breach  of  trust,  but  only  error 
or  mistake  of  judinnont  upon  the  part  of  the  directors 

15.  Durfco  V.  OM  Colony,  etc.,  By.  Co..  5  Allen   (Mass.),  230. 


POWER   OF   MAJORITY.  155 

who  represent  the  company,  individual  stockholders 
have  no  right  to  appeal  to  the  courts  to  dictate  the  line 
of  policy  to  be  pursued  by  the  corporation."  ^^ 

It  follows  from  these  decisions,  which  have  been 
unanimously  uj)held,  that  there  are  limits  beyond 
which  a  majority  cannot  go.  The  majority  has  no 
greater  power  than  the  corporation  itself,  and  any^ 
attem^Dt  on  their  part  to  go  beyond  that  power  will 
give  a  dissenting  shareholder  the  right  to  seek  equitable 
relief  by  injunction  and  to  further  set  the  transaction 
aside.^^  !N^or  can  they  manipulate  the  company's 
business  in  their  o^vn  interests  to  the  injury  of  other 
shareholders.  "  The  owners  of  a  majority  of  the  capi- 
tal stock  of  a  corporation  may  legally  control  the  com- 
pany's business,  prescribe  its  general  policy,  make 
themselves  its  agents,  and  take  reasonable  compensa- 
tion for  their  services.  But,  in  assuming  the  control, 
they  also  take  upon  themselves  the  correlative  duty  of 
diligence  and  good  faith.  They  cannot  lawfully  ma- 
nipulate the  company's  business  in  their  own  interests 
to  the  injury  of  other  corporators."  ^^ 

The  constitutional  protection  to  contracts  applies 
here,  in  that  a  majority  cannot  force  a  minority  into 
an  enterprise  which  differs  from  that  originally  stated 
in  the  charter,  even  thougii  a  statute  passed  subse- 
quently to  the  incorporation  allows  the  corporation  to 
undertake  the  enterprise. ^° 

§  162.  Power  of  majority  to  alienate  the  property. — 
"  We  entertain  no  doubt  of  the  right  of  a  corporation, 
established  solely  for  trading  and  manufacturing  pur- 

16.  DiuUev  V.  Kentucky  High  School.  9  Bush  (Ky.),  576;  Foss 
V.  Harbottle^  2  Hare,  461. 

17.  Tomkinson  v.  Poutheastern  Rv.  Co..  L.  R..  .35  Ch.  Div. 
675:  Dodge  v.  Woolsev.  18  How.   (59  U.  S.)    331. 

18.  :Mpeker  v.  Winthrop  Iron  Co.,  17  Fed.  48;  Atwood  v.  Merry- 
weather.  L.  R.,  5  Eq.  464,  n. 

19.  Stevens  v.  Rutland,  etc..  Ry.  Co..  29  Vt.  545;  Zabriskie  v. 
Hackensack,  etc..  Ry.  Co.,  18  N.  J.  Eq.  178. 


156     SUMMARY    OF   LAW   OF   PRIVATE   CORPORATIONS, 

poses,  by  a  veto  of  a  majority  of  their  stockholders,  to 
wind  up  their  affairs  and  close  their  business,  if  in 
the  exercise  of  a  sound  discretion  they  deem  it  expe- 
dient so  to  do.  *  *  *  Public  policy  does  not  re- 
quire them  to  go  on  at  a  loss.  On  the  contrary,  it 
would  seem  very  clearly  for  the  public  welfare,  as 
well  as  for  the  interests  of  the  stockholders,  that  they 
should  cease  to  transact  business  as  soon  as,  in  the  ex- 
ercise of  a  sound  judgment,  it  is  found  that  it  cannot 
be  prudently  continued.  If  this  be  not  so  we  do  not 
see  that  any  limit  could  be  put  to  the  business  of  a 
trading  corporation,  short  of  the  entire  loss  or  destimc- 
tion  of  the  corporate  property.  The  stockholders 
could  be  compelled  to  carry  it  on  until  it  came  to  actual 
insolvency.  Such  a  doctrine  is  without  any  support  in 
reason  or  authority."  "^ 

Under  such  conditions  the  manner  of  closing  up  the 
business  is  immaterial,  so  long  as  it  be  done  in  good 
faith.  The  majority  may  dispose  of  the  property  to 
another  corporation  and  take  stock  in  this  latter,  to 
be  distributed  among  the  shareholders  of  the  former,  if 
all  shareholders  consent.^^  A  dissenting  shareholder 
must  be  provided  for,  however,  and  if  he  refuses  to 
accept  such  stock,  he  may  enjoin  the  sale  until  such 
time  as  his  rights  are  secured." 

On  the  other  hand,  if  the  circumstances  do  not  re- 
quire a  winding-up  of  the  corporate  enterprise,  the 
majority  cannot,  against  a  dissenting  minority,  dis- 
pose of  the  corporate  property,  and  every  shareholder 
has  the  right  to  insist  that  the  business  shall  be  con- 
tinued in  accordance  with  the  charter. ^^     It  is  further 

20.  Treadwell  v.  Salisbury  Mfor.  Co..  7  Gray,  303:  Hodges  v. 
New  Entrland  Screw  Co..   1  E.  T.  312. 

21.  Treadwell  v.  Salisbury  Mfg.  Co..  7  Gray.  393. 

22.  Lanman  v.  Lebanon  Valley  Ry.  Co.,  30  Pa.  St.  42. 

23.  Kean  v.  Johnson,  9  N.  J.  Eq.  401:  Elyton  Land  Co.  v. 
Dowdell,  113  Ala.  177. 


II 


BY-LAWS.  157 

implied  that  this  power  of  the  majority  would  not  at- 
tach to  a  public-service  corporation,  unless  the  consent 
of  the  State  be  obtained. 

An  attempt  on  the  part  of  a  majority  to  transfer  the 
property  of  a  going  concern,  merely  for  the  purpose 
of  turning  the  corporation  into  a  foreign  one,  for  the 
purpose  of  avoiding  the  requirements  of  the  parent 
State  may  be  frustrated  by  any  dissenting  shareholder, 
for  this  amounts,  in  fact,  to  a  dissolution.^'* 

By-la WxS;  Power  to  Make. 

§  163.  The  power  to  make  by-laws  has  already  been 
spoken  of.  "As  reason  is  given  to  the  natural  body 
for  the  governing  of  it,  so  the  coi-porate  body  must 
have  laws,  as  a  politic  reason  to  govern  it."  ^"^  By-laws 
are  rules  adopted  by  the  majority  of  shareholders  for 
the  guidance  and  management  of  the  internal  affairs 
of  the  corporation,  and  so  long  as  they  do  not  contra- 
vene the  "  law  of  the  realm  "  or  conflict  with  the  char- 
ter or  articles  of  incorj)oration,  they  are  binding  upon 
each  and  every  shareholder.  To  be  valid  they  must 
be  adopted  at  a  meeting  regularly  called  and  conducted 
according  to  law,  and  charter  as  well  as  statutory  pro- 
visions must  be  complied  with  in  adopting  them.^^ 
Charter  or  statute  may  vest  the  power  to  make  thein 
in  the  directors  or  other  body,  but  unless  this  is  so 
done,  the  power  to  enact  is  in  a  majority  vote  of  the 
shareholders. 

The  power  to  repeal,  alter,  or  amend  the  by-laws 
remains  to  and  ^vith  the  same  body  that  originally 
enacted  them,  subject  always  to  the  iTile  that  vested 
interests  cannot  be  taken  away.     "  The  power  to  make 

24.  People    v.    Ballard,    134    X.    Y.    269;    Tavlor    v.    Earle,    3 
Hun   (N.  Y.),  1. 

25.  Norris  v.  Staps,  Hobart's  Rep.,  p.  211a. 

26.  Mutual  Fire  Tns.  Co.  v.  Farquhar,  86  Md.  668;   Vercontre 
V.  Golden,  etc.,  Co.,  116  Cal.  410. 


158      SUMMARY    OF    LAW    OF    I'laVATK    CORPORATIONS. 

bj^-laws  is  to  mate  such  as  are  not  inconsistent  \\'ith 
the  constitution  and  the  law;  and  the  power  to  alter 
has  the  same  limit,  so  that  no  alteration  could  be  made 
which  would  infringe  a  right  already  given  and  secured 
by  the  contract  of  the  corporation.  *  *  *  xhe 
alteration  of  a  by-law  is  but  the  making  of  another 
upon  the  same  matter.  If  the  first  must  be  reasonable 
and  in  accord  with  the  principles  of  law,  so  must  that 
which  alters  it.  If,  then,  the  power  is  resen'^ed  to 
alter,  amend,  or  repeal,  and  that  reservation  enters  into 
a  contract,  the  power  reserved  is  to  pass  reasonable 
by-laws,  agreeable  to  law.  But  a  by-law  that  will  dis- 
turb a  vested  right  is  not  such."  ^^  Circumstances  may 
arise  which  may  impliedly  repeal  a  by-law,  as  in  the 
case  of  a  subsequent  statute,  or  a  subsequent  by-law 
which  may  be  inconsistent  with  the  former.  So  too 
repeated  usage  to  the  contrary  would  render  the  by- 
law useless  and  impliedly  repeal  it,  for  it  has  been 
waived,  and  cannot  be  set  up  as  against  third  parties,  or 
even  the  shareholders,^* 

§  164.  The  rights  of  members  under. — As  already  im- 
plied, if  the  by-laws  were  enacted  in  accordance  with 
the  law  and  the  charter,  they  are  binding  upon  all  the 
shareholders,  whether  they  consent  to  them  or  not,  so 
long  as  they  do  not  impair  his  rights  under  his  con- 
tract of  membership.  Some  method  of  procedure  and 
of  transacting  business  must  be  adopted,  and  the  share- 
holder impliedly  agrees  to  be  governed  by  the  will  of 
the  majority  within  the  limits  of  the  chartered  rights. 
Under  such  circumstances,  the  shareholder  is  bound 
to  take  notice  of  the  by-laws,  and  is  so  chargeable.^^ 
So  too,  if  a  shareholder  become  such  after  the  adop- 
tion of  the  by-laws,  he  impliedly  consents  to  them, 

27.  Kent  v.  Quicksilver  Mining  Co.,  78  N.  Y.  159. 

28.  Susquehanna,  etc..  Co.  v.  Elkins,  124  Pa.  St.  484;  Currier 
V.  Continental,  etc.,  Co.,  53  N.  H.  538. 

29.  McFadden  v.  Tx)s  Angeles,  etc..  74  Cal.  571. 


BY-LAWS.  159 

and  they  become  part  and  parcel  of  his  contract  ^vith 
the  corporation.^^ 

But  it  seems  that  the  shareholder  is  to  be  treated 
as  a  stranger  in  such  transactions  with  the  corporation 
as  do  not  concern  his  position  as  shareholder.  In 
other  words,  if  he  deal  with  the  corporation  in  business 
transactions,  he  is  not  chargeable  with  notice  of  the 
by-laws.^^ 

§  165.  The  rights  of  third  parties  under. —  By-laws 
which  merely  regulate  the  management  of  the  corpo- 
ration and  duties  of  the  officers  do  not  affect  the  rights 
of  third  parties  dealing  with  it.^^  So  too  they  are  not 
bound  by  by-laws  which  are  unauthorized  and  of  which 
they  have  no  actual  notice.^^  But  if  the  charter  of 
the  corporation  expressly  authorize  certain  by-laws, 
third  parties  are  chargeable  with  notice  thereof,  and 
they  enter  into  the  contracts  and  are  binding  both 
for  and  against  the  corporation,^"*  unless  the  party  ex- 
pressly exclude  the  by-law  in  his  contract. 

The  most  frequent  illustrations  of  the  rights  of 
third  parties  are  found  in  cases  where  by-laws  impose 
limitations  upon  the  apparent  duties  of  the  officers  and 
agents  of  the  corporation,  with  respect  to  the  making 
of  contracts.  If  the  third  party  has  actual  notice  of 
such  by-law  he  will  be  bound  thereby,  but  not  other- 
wise;^ and  corporations  holding  out  an  agent  or  officer 
as  having  apparent  authority  and  accepting  the  fruits 
of  such  contracts  cannot  set  up  a  violation  of  the  by- 
laws as  a  defense. 


30.  Matthews  v.  Associated  Press,  136  N.  Y.  333. 

31.  Pearsall  v.  Western  Union  Co.,  124  N.  Y.  256. 

32.  Ashley  Wire  Co.  v.  Illinois  Steel  Co.,  164  111.  149. 

33.  Idem. 

34.  Brent  v.  Bank  of  Washington,  10  Pet.  596;  Flint  v.  Pierce, 
99  Mass.  68. 

35.  Smith  v.  Smith,  62  111.  493;  Tome  v.  Parkersburpr.  etc.,  Ry. 
Co..  30  Md.  36:  Barnes  v.  Black,  eto..  Coal  Co.,  101  Tenn.  S54; 
Pearsall  v.  Western  Union,  124  N.  Y.  256. 


160      KL-MMARY    OF    LAW    OF    I'KINATE    COia'OKATlO^fS. 
DiRECTOKS. 

§  1G6.  Qualifications. — "  In  the  absence  of  a  statute 
reqiiiriug  it,  the  discretion  of  the  stockholders  in  elect- 
ing directors  is  not  limited  to  persons  holding  stock."  '^'^ 
The  fact  that  a  person  is  an  -alien,  a  bankrupt,  a  non- 
resident, or  an  officer  does  not  disqualify  him  in  the 
absence  of  statutory  enactments  to  the  contrary,  or 
of  by-laws  prohibiting.  The  by-laws,  as  well  as  stat- 
ute, may  provide  otherwise,  however,  and  fix  the  quali- 
fications of  directors.  Most  of  the  States  provide 
statutory  requirements  in  this  particular,  the  most 
familiar  one  of  which  is  that  the  director  shall  be  a 
shareholder. 

Directors  are  elected  by  the  shareholders  on  a 
majority  vote  of  those  present.  Statutes  usually  pro- 
vide a  maximum  and  minimum  number  of  directors 
to  be  chosen,  and  the  charter  or  articles  of  incorpora- 
tion usually  provides  for  the  exact  number  within  the 
statutory  provision,  though  the  ntmiber  first  stated  in 
the  articles  may  be  increased  or  diminished  by  the  cor- 
poration following  statutory  provisions  to  that  effect. 

§  1G7.  Power  of  directors. —  "All  powers  directly 
conferred  by  statute,  or  impliedly  granted,  of  neces- 
sity must  be  exercised  by  the  directors  who  are  con- 
stituted by  the  law  as  the  agency  for  the  doing  of 
corporate  acts.  The  expression  of  the  corporate  will 
and  the  performance  of  cor]>orate  functions  in  the 
management  of  a  corporation  may  originate  with  its 
directors,  where  the  law  or  tlio  by-laws  have  not  ex- 
pressly restricted  their  authority  and  made  their  action 
to  rest  for  its  validity  upon  the  concurrence  of  the 
stockholders  by  previous  action  or  subsequent  ratifica- 
tion.    "Within  the  chartered  authority  they  have  the 

36.  State  v.  McDaniel,  22  Ohio  St.  at  p.  3G7  ;  see  also  Beards 
ley  V.  Johnson,  121  N.  Y.  224;  Re  St.  Lawrence,  etc.,  Co.,  44  N.  J. 
L.  at  p.   .541. 


DIEECTOES.  161 

fullest  power  to  regulate  the  concerns  of  a  corporation 
according  to  their  best  judgment,  and  contracts  which 
the  corporation  could  legitimately  make  come  within 
the  scope  of  the  ordinary  powers  of  corporate  man- 
agement. *  *  *  Xhe  duties  of  directors  are  of 
the  most  responsible  kind,  and  it  is  in  the  purview 
of  the  law  that  they  should  be  held  to  a  strict  accounta- 
bility for  their  acts  to  the  stockholders,  toward  whom 
they  occupy  the  relation  of  trustees,  with  all  which 
that  term  implies  of  powder  and  responsibility.  In  the 
management  of  the  affairs  of  the  corporation  they  are 
dependent  solely  upon  their  own  knowledge  of  its  busi- 
ness, and  their  own  judgment  as  to  what  its  interests 
require.  *  *  *  They  must  exercise  all  the  powers 
of  a  corjDoration,  subject  to  the  general  law  and  to 
the  by-laws  of  the  company,  and,  where  they  act  in 
good  faith  and  without  fraud  or  collusion,  their  action 
is  conclusive  upon  the  corporation.  As  agents  of  the 
corporation,  we  find  the  extent  of  their  powers  by  an 
examination  of  the  laws  under  which  it  was  created 
and  exists.  *  *  *  <  The  board  of  directors  of  a 
coi-poration  do  not  stand  in  the  same  relation  to  the 
corporate  body  which  a  private  agent  holds  toward 
his  principal.  In  the  strict  relation  of  principal  and 
agent,  all  the  authority  of  the  latter  is  derived  by 
delegation  from  the  fonner.  *  *  *  B^^it  in  cor- 
porate bodies  the  powers  of  the  board  of  directors  are, 
in  a  very  important  sense,  original  and  undelegated. 
The  stockholders  do  not  confer,  nor  can  they  revoke 
those  powers.  They  are  derivative  only  in  the  sense 
of  being  received  from  the  State  in  the  act  of  incor- 
poration. The  directors  convened  as  a  board  are  the 
primary  possessors  of  all  the  powers  which  the  char- 
ter confines.  ***/***  "What  business  a 
corporation  can  do  mthin  its  chartered  limits  and  in 
or  about  that  business,  by  a  statutory  authority,  its 
11 


162      SUMMARY    OF   LAW   OF    PRIVATE   CORPORATIONS. 

directors  hold  a  delegated  power  from  the  legislature 
to  do  for  it."  ^' 

An  attempt  to  enlarge  upon  this  statement  would 
be  productive  only  of  specific  powers  held  by  the 
directors.  The  general  and  specific  powers  of  a  cor- 
poration have  already  been  outlined,  and  the  general 
statement  that  wiiliin  the  limits  of  its  chartered  "powers 
the  diltectors  can  do  all  that  the  corporation  can  do, 
unless  specially  restricted  by  statute,  charter,  or  by- 
law holds  good.^^ 

It  must  be  noted  that  this  statement  is  qualified  and 
limited  to  acts  within  the  chartered  powers.  There 
are  acts  which  the  corporation  as  a  body  of  sharehold- 
ers may  do  which  the  directors  cannot  do.  Their 
authority  does  not  extend  to  changes  in  the  general 
character  or  purposes  of  the  corporation,  nor  can  they 
dissolve  the  corporation,  unless  authorized  to  do  so."^ 
Directors  cannot,  under  this  general  clause,  accept 
amendments  to  the  charter,  nor  may  they  apply  to  the 
legislature  for  such  amendments;  they  cannot  increase 
or  decrease  the  capital  stock,  nor  can  they  consolidate 
with  another  corporation.  They  cannot  change  the 
by-laws  in  any  way,  nor  can  they  sell  out,  directly  or 
indirectly,  the  business  and  property  of  a  going  con- 
cern in  such  a  way  as  to  virtually  end  its  existence. 
All  of  these  acts  are  corporate  acts,  and,  as  we  have 
already  seen,  must  be  performed  by  the  shareholders 
acting  as  a  legally  constituted  body. 

37.  Beveridpe  v.  N.  Y.  Elevated  Rv.  Co..  112  N.  Y.  1,  citing 
Leslie  v.  Lorillard,  110  id.  536;  Hoyt  v.  Thompson's  Ex.,  19  id. 
216. 

38.  See  Burrill  v.  Naliant  Bank,  2  Mete.  (Mass.)  163;  Hutch- 
inson V.  Green,  91  Mo.  367;  First  Nat.  Bank  v.  National  Exchange 
Bank,  92  U.  S.  122;  Chambers  v.  McKee.  185  Pa.  St.  105. 

39.  Chicago  City  Ry.  Co.  v.  Allerton,  18  Wall.  233;  Metro- 
politan Elevated  Ry.  Co.  v.  Manhattan  Elevated  Ry.  Co.,  11  Daly, 
373. 


DIRECTORS.  163 

§  168.  Directors  and  the  corporation.^'^ — A  director  of 
a  corporation  occupies  the  relation  of  trustee  to  the 
corporation  in  regard  to  its  property  and  its  property 
interests.  "  That  a  director  of  a  joint-stock  corpora- 
tion occupies  one  of  those  fiduciary  relations  "where 
his  dealings  with  the  subject-matter  of  his  trust  or 
agency,  and  with  the  beneficiary  or  party  whose  inter- 
est is  confided  to  his  care,  is  viewed  with  jealousy  by 
the  courts,  and  may  be  set  aside  on  slight  grounds,  is 
a  doctrine  founded  on  the  soundest  morality,  and  which 
has  received  the  clearest  recognition  in  this  court  and 
in  others."  ^^ 

§  169.  Liability  of  directors  to  the  corporation. — 
Directors  are  boimd  to  possess  ordinary  skill  and  ca- 
pacity, and  to  exercise  reasonable  care  and  diligence, 
in  the  exercise  of  the  powers  conferred  upon  them, 
having  reference  to  the  character  of  the  corporation 
and  the  kind  of  business  conducted  by  it.^^ 

Whether  the  standard  of  reasonable  care  and  dili- 
gence is  that  which  an  ordinarily  prudent  man  will 
exercise  in  his  own  affairs,*^  or  that  which  he  will  ex- 
ercise about  the  business  of  a  corporation  of  which 
he  is  a  director,  is  left  somewhat  in  doubt  by  the 
authorities,  but  the  latter  view  seems  the  more  just  and 
reasonable.^^ 

When  directors  act  in  excess  of  their  powers,  the 

40.  See  on  this  subject  excellent  summary  to  note  to  Bosworth 
V.  Allen,  55  L.  R.  A.  751  which  has  been  freelv  used. 

41.  Twin-Lick  Oil  Co.  v.  Marbury.  91  U.  S!  587.  See  also  Bird, 
etc.,  Co.  V.  Humes,  157  Pa.  St.  278:  Covington,  etc.,  Co.  v. 
Bowler,  72  Kv.  468;  Hoffman  v.  Reichert,  147  111.  274;  Jackson 
V.  Ludeling,  88  U.  S.  616. 

42.  Thompson  v.  Greelv.  107  Mo.  577;  Scott  v.  De  Peyster,  1 
Edw.  Ch.  512;  Hun  v.  Carv,  82  N.  Y.  65;  Campbell  v.  Watson, 
62  X.  J.  Eq.  396;   Vance  v.   Insurance  Co..  4  Lea,  .385. 

43.  Com.  Bank  v.  Chatfiekl.  121  Mich.  641;  Ackerman  v.  Hal- 
scv.  38  N.  J.  Eq.  501;  Warren  v.  Robinson,  19  Utah,  289. 

44.  Swentzel  v.  Penn.  Bank.  147  Pa.  St.  140;  Campbell  v.  Wat- 
F^on,  62  N.  J.  Eq.  396:  Briirgs  v.  Spaulding,  141  U.  S.  132; 
North,  etc.,  Assn.  v.  Childs,  82  Wis.  460. 


IG-i      SUilMAIlY    OF    LAW    OF    PKIVATE   CORPOKATIOIN'S. 

standard  of  reasonable  caro  and  diligence,  if  applicable 
at  all,  is  only  to  be  applied  for  the  purpose  of  deter- 
mining whether  they  were  culpable  in  not  knowing 
that  thej  were  exceeding  their  authority.  If  they 
knowingly  exceeded  their  authority,  their  liability  for 
resulting  losses  is  established  without  reference  to  the 
question  whether  or  not  what  they  did  might  be  jus- 
tified on  the  principle  of  reasonable  care/""  This  state- 
ment, however,  is  subject  to  the  qualification  that  tliere 
may  have  been  such  assent  or  acquies'cence  by  the  per- 
sons interested  as  estops  them  to  complain/" 

Directors,  however,  are  not  in  every  case  bound  to 
judge  correctly  of  their  powers  under  penalty  of  being 
subjected  to  liability  for  losses  if  they  make  a  mis- 
take. If,  in  the  exercise  of  good  faith,  they  make  a 
mistake  as  to  a  point  upon  which  the  charter  or  by- 
laws is  not  clear,  taking  the  advice  of  counsel  if  they 
feel  doubtful,  they  may  be  exonerated.'*^ 

Directors  are  liable,  if  at  all,  for  losses  due  to  an 
error  of  judgment,  with  reference  to  matters  within 
their  authority,  only  when  the  error  was  so  gross  that  a 
person  of  ordinary  capacity,  exercising  reasonable  care, 
would  not  have  fallen  into  it.  In  applying  this  test, 
the  transaction  must  be  viewed  from  the  standpoint  of 
the  time  when  the  directors  exercised  their  judgment 
-with  reference  to  it,  and  not  from  the  standpoint  of  the 
present.^^ 

Directors  are  bound  to  use  reasonable  care  to  choose 
honest  and  capable  men  as  executive  officers  and  em- 

45.  Cockrill  v.  Cooper,  80  Fed.  7:  Thompson  v.  rxreelr.  107  Mo. 
577;  Hawkins  v.  Railway  Co.,  2  Webb  &  Meigs'  Digest  (Tenn.), 
p.  963. 

46.  Holmes  v.  Willarrl.  12.5  N.  Y.  75;  Citizens,  etc.,  Co.  v. 
Coriell.  34  N.  J.  Eq.  383. 

47.  Pickering  v.  Stephenson,  L.  R.,  14  Eq.  322;  Williams  v. 
McKay,  46  N.  J.  Eq.  25;  Vance  v.  Phoenix  Ins.  Co.,  4  Lea  (Tenn.) , 
385. 

48.  Lagunas  Co.  v.  Lajrunns  Rvndicato.  2  Ch.  (ISnO)  392;  Sper- 
ing's  Appeal,  71  Pa.  St.  11;  Hun  v.  Cary,  82  N.  Y.  65. 


I 


DIEECTOES.  1G5 

ployees;  but  having  exercised  such  care,  they  are  not 
insurers  of  the  fidelity  or  cai:)acity  of  such  persons,  and 
in  order  to  render  tliem  liable  for  the  fraud  or  mis- 
conduct of  the  latter,  they  must  themselves  have  been 
guilty  of  some  dereliction  of  duty,  the  perfomiance  of 
which  would  iiave  prevented  the  losses.*^ 

Unless  a  director  is  himself  guilty  of  misconduct,  he 
cannot  at  common  law  be  held  liable  for  the  misconduct 
of  his  codirectors.^^ 

When  a  director  is  aware  of  a  course  of  conduct  con- 
templated by  his  co-directors,  which  he  regards  as 
prejudicial  to  the  interests  of  the  corporation,  it  seems 
to  be  his  duty  to  protest,  and  if  the  contemplated  action 
involves  a  violation  of  the  charter,  to  take  measures 
to  prevent  it.^^  It  is  competent  for  directors  to  dele- 
gate certain  functions  of  the  board  to  committees  ap- 
pointed from  their  number,  and  the  directors  who  are 
not  on  such  committees  will  not  be  held  to  the  same 
degree  of  care  and  attention  as  the  members,  with 
reference  to  the  matters  intnisted  to  the  latter,  but 
such  nonmembers  are  not  entitled  to  relax  their  vigi- 
lance altogether,  or  to  rely  entirely  upon  the  commit- 
teemen, but  are  bound  to  exercise  a  reasonable  cir- 
cumspection of  their  conduct. ^^ 

Since  directors  are  not  responsible  for  errors  of 
judgment  not  inconsistent  with  the  possession  of  ordi- 
nary capacity  and  the  exercise  of  ordinary  care,  and 
are  not  insurers  of  the  honesty  and  capacity  of  their 
appointees,  it  follows  that  the  amount  of  losses  sus- 


49.  Brigfrs  v.  Spauldinp,  141  U.  S.  1.32;  Wheeler  v.  Aiken, 
etc.,  Bank,  75  Fed.  781;  Warner  v.  Penoyer,  91  id.  587. 

50.  Fisher  v.  Graves,  80  Fed.  590;  Brigss  v.  Spauldin?,  141 
U.  S.  132. 

51.  Grimwader  v.  Mutual  Sodety.  52  L.  T.  X.  S.  409:  Paino 
V.  Barnum,  9  How.  Pr.  303 ;  Percv  v.  Millaudon,  8  Mart.  N.  S.  68 ; 
Joint  Stock  Co.  a".  Brown.  L.  R.'  8  Eq.  381. 

52.  Warner  v.  Pennoyer,  91  Fed.  587;  Williams  v.  McKay,  4G 
N.  J.  Eq.  25. 


1G6      SUMMARY    OF    LAW   OF    PiaVATE   COKPOIMTIONS. 

taimd  by  the  corporation  in  the  prosecution  of  its 
business  is  not  necessarily  the  measure  of  their  responsi- 
bility, but  only  the  amount  of  losses  which  are  at- 
tributable to  their  acts  in  excess  of  their  authority,  or 
to  their  failure  to  exercise  reasonable  care  in  the  ex- 
ercise of  the  powers  conferred  upon  them.  Even 
when  they  have  exceeded  their  authority,  or  have  failed 
to  exercise  reasonable  care  in  the  exercise  of  their 
authority,  there  is,  of  course,  in  the  absence  of  a  statu- 
tory penalty,  no  liability,  unless  their  misconduct  in 
that  respect  can  be  regarded  as  the  proximate  cause 
of  the  losses  suffered  h\  the  corporation. °^ 

§  170.  Contracts  between  corporations  and  their 
directors. —  In  respect  to  the  validity  of  contracts  made 
between  a  corporation  and  a  director  therein  three 
views  have  been  taken:  First,  that  such  contracts  are 
void;  second,  that  they  are  voidable;  and  third,  that 
they  are  valid  if  fair  and  just,  and  made  in  good  faith. 

I.  A  few  authorities  maintain  without  qualification 
that  such  contracts  are  void  as  against  public  policy. 
These  cases  held  that,  as  a  director  stands  in  a  fiduciary 
relation  to  the  corporation,  he  cannot  be  allowed  to 
enter  into  any  engagement  in  which  he  may  have  any 
personal  interest  conflicting  with  the  interests  of  the 
corporation.^'* 

II.  Other  authorities  hold  that  a  contract  between  a 
corporf-tion  and  its  directors  is  not  void  per  se,  but 
voidable  at  the  option  of  the  corporation,  provided  the 
option  is  exercised  within  a  reasonable  time.^^ 

53.  Bloom  V.  National,  etc.,  Co.,  152  N.  Y.  114;  Cockrill  v. 
Abeles,  86  Fed.  50.5;  Scott  v.  De  Peyster.  1  Edw.  Ch.  513. 

54.  Aberdeen  R.  Co.  v.  Blaikie,  1  Macq.  H.  L.  (Scot.)  461; 
Wilbur  V.  Lynde.  49  Cal.  290;  Port  v.  Russell,  36  Ind.  65;  Gard- 
r.er  v.  Butler,  30  N.  J.  Eq.  702;  Coleman  v.  Second  Ave.  R.  Co., 
38  N.  Y.  201;  Hay^vood  v.  Lincoln  Lumber  Co.,  64  Wis.  647. 

55.  Thomas  v.  Brownville,  etc.,  R.  Co.,  109  U.  S.  522;  Leaven 
vorth  Co.  V.  Chicago,  etc.,  R.  Co.,  134  id.  70«  •  f^^'ll  v    NjsUof    ]0t 
Ind.   353:    European,  etc..   R.  Co.  v.  Poor.  59  Me.   277;    Hoffman 
Steam  Coal  Co.  v.  Cumberland  Coal,  etc.,  Co..  16  Md.  456;  Kelley 
V.    Xewburyport,   etc..    Horse   R.    Co.,    141    Mass.   499;    People   v. 


4 

4 


DIEECTOKS.  167 

III.  The  third  view  is  that  such  contracts,  when  fair 
in  themselves,  and  entered  into  in  good  faith  are  valid; 
but  the  courts  will  closely  scrutinize  them  to  see  that 
the;y;  fulfill  the  above  requisites.""^ 

§  171.  Directors  and  shareholders. — "  There  is  no  legal 
privity,  relation,  or  immediate  connection  between  the 
holders  of  shares  in  a  bank,  in- their  individual  capacity, 
on  the  one  side,  and  the  directors  of  the  bank  on  the 
other.  The  directors  are  not  the  bailees,  the  factors, 
agents,  or  trustees  of  such  individual  stockholders.  The 
bank  is  a  coqDoration  and  body  politic  having  a  sepa- 
rate existence  as  a  distinct  person  in  law,  in  whom 
the  whole  stock  and  property  of  the  bank  are  vested, 
and  to  whom  all  agents,  debtors,  officers,  and  servants 
are  responsible  for  all  contracts,  express  or  implied, 
made  in  reference  to  such  capital,  and  for  all  torts 
and  injuries  diminishing  or  impairing  it.  The  very 
puq^ose  of  incorporation  is  to  create  such  legal  and 
ideal  person  in  law,  distinct  from  all  those  persons 
composing  it,  in  order  to  avoid  the  extreme  difficulty, 
and  perhaps  it  is  not  too  much  to  say  the  utter  im- 
practicability, if  such  a  numbe-r  of  persons:  acting  to- 
gether in  their  individual  capacities  *  *  *.  The 
stoakholders  do,  indeed,  ordinarily  elect  the  directors; 
but  it  is  as  parts  and  members  of  the  corporation,  in 
their  corporate  capacity,  in  modes  pointed  out  by  the 
charter  and  by-laws,  so  that  the  directors  are  the  ap- 
pointees of  the  corporation,  not  of  the  individuals. 
*  *  *  To  the  extent  of  this  (his)  separate  and 
peculiar  interest,  a  shareholder,  no  doubt,  might  main- 
Township  Board.  11  Mich.  222:  Currie  v.  School  District.  Xo.  26, 
35  ]\Iinn.  163:  Stewart  v.  Lehigh  Valley  R.  Co.,  38  N.  J.  L.  505; 
Munson  v.  Syracuse,  etc.,  R.  Co.,  103  N.  Y.  58. 

56.  Northwest  Transportation  Co.  v.  Beatty,  L.  R.,  12  App. 
Cas.  589;  Pneumatic  Gas  Co.  v.  Berry,  113  U.'  S.  322;  Smith  v. 
Skeary,  47  Conn.  47 :  German-American  Seminarv  v.  Kiefer.  43 
Mich.  105:  Gamble  v.  Queens  Co.  Water  Co.,  123  N.  Y.  91;  Put- 
nam V.  Rubicon,  32  Wis.  498. 


168      SUMMARY    OF   LAW    OF    PEIVATE   COErOKATIONS. 

tain  his  separate  and  special  action,  according  to  the 
nature  of  the  wrong  done  to  him  in  respect  to  it;  as 
trover  or  trespass,  for  the  conversion  or  tortious  taking 
of  his  certificate;  trespass  on  the  case  for  refusing  to 
make  a  transfer  on  a  proper  occasion;  assumpsit  for  a 
dividend  declared,  and  the  like.  But  an  injury  done 
to  the  stock  and  capital,  bj  negligence  or  misfeasance, 
is  not  an  injury  to  such  separate  interest,  but  to  the 
whole  body  of  stockholders  in  common."  ^^ 

§  172.  Directors  and  creditors. —  Aside  from  statu- 
tory liability  of  directors  to  creditors,  the  general  rule 
is  that  directors  are  not  liable  to  creditors  for  their 
acts,  unless  fraud  or  connivance  or  gross  delinquency 
be  apparent  and  proved. 

"  It  has  always  been  held  that  the  directors  are  trus- 
tees for  the  shareholder —  that  is,  the  company.  They 
are  the  managing  partners  of  the  company,  and  if  they 
abuse  their  powers,  which  they  hold  in  trust  for  the 
company,  to  the  damage  of  the  company  for  their  own. 
benefit,  they  are  liable  to  make  good  the  breach  of 
trust  to  their  cestui  que  trust  like  any  other  trustees. 
But  directors  are  not  trustees  for  the  creditors  of  the 
company.  The  creditors  have  certain  rights  against  a 
company  and  its  members,  but  they  have  no  greater 
rights  against  the  directors  than  against  any  other  mem- 
bers of  the  company.  They  have  only  those  statutory 
rights  against  the  members  which  are  given  them  in 
the  winding  up."  ^^ 

"  The  directors  of  a  bank  are  trustees  for  depositors, 
as  well  as  for  stockholders;  *  *  *  they  are  bound 
to  the  observance  of  ordinary  care  and  diligence,  and 
are  hence  liable  for  injuries  resulting  from  their  non- 
observance     *     *     *."  ^^ 

57.  Smith  v.  Hurd,  1.2  Mete.  (Mass.)  371.  See  also  Deaderick 
V.  Wilson,  S  Baxt.    (Tenn.)    108. 

58.  Wincham.  etc..  Co..  L.  R.,  9  Ch.  Div.  322-328. 

59.  Delano  v.  Case,  121  111.  247. 


DIRECTORS.  169 

Directors  "  are  trustees  for  the  company,  for  the 
shareholders,  for  the  creditors,  and  for  the  State. 
They  must  not  only  use  good  faith,  but  also  care,  at- 
tention, and  circumspection  in  the  affairs  of  the  corpora- 
tion, and  particularly  in  the  safe-keeping  and  disburse- 
ment of  funds  committed  to  their  custody  and  control. 
They  must  see  that  these  funds  are  appropriated  as  in- 
tended to  the  purposes  of  the  trust,  and  if  they  mis- 
appropriate  them  or  allow  others  to  divert  them  from 
these  purposes,  they  must  answer  for  it  to  their  cestui^ 
que  trust."  ^^  This  last  statement  means  nothing  save 
that  an  individual  or  a  group  of  individuals  must  be  hon- 
orable and  honest  in  their  dealings,  and  if  guilty  of  a 
crime,  they  shall  answer  therefor  to  the  State  and  the 
parties  they  have  wronged.  To  say  that  directors  "  are 
trustees  for  the  company,  for  the  shareholders,  for  the 
creditors,  and  for  the  State,"  is  going  too  far,  and 
reaches  a  point  which  borders  on  the  absurd. 

General  rules  as  to  the  liability  of  directors  to  cred- 
itors may  be  stated  as  follows: 

In  the  absence  of  fraud  or  such  gross  negligence  that 
it  amounts  to  fraud  on  the  part  of  the  directors  of  a 
corporation,  they  are  not  liable  to  corporate  creditors 
for  mismanagement  of  the  business  of  the  concern  or 
for  waste  of  its  assets. ^^ 

A  director  may  be  held  personally  liable  to  a  creditor 
of  the  corporation  because  of  the  wrongful  diversion 
of  the  corporate  assets  by  his  co-directors,  although  he 
was  only  guilty  of  gross  negligence  and  inattention  to 
his  official  duties;®^  but  he  is  not  liable  for  such  ^vrong- 
ful  diversion  in  the  absence  of  personal  delinquency 
or  connivance.^ 

60.  Shea  v.  :\[abrv.   1  Lea    (Tenn.1.  310-342. 

61.  Swentzel  v.  Penn.  Bank.  147  Pa.  St.  140:  Vose  v.  Grant, 
15  Mass.  505:  Saranac.  etc..  Rr.  Co.  v.  Arnold,  41  App.  Div.  482. 

62.  Nix  V.  Miller.  26  Colo.  203. 

63.  Saranac.  etc..  Rv.  Co.  v.  Arnold,  41  App.  Div.  (N.  Y.)  482: 
s.  c,   167  N.  Y.  368.  " 


170     SUMMARY    OF   LAW   OF    PRIVATE    CORPORATIONS. 

§  173.  Director's  right  to  compensation Directors  of 

a  coi-poration  cannot  recover  compensation  for  services 
rendered,  unless  the  compensation  has  been  previously 
fixed  by  a  by-law  or  a  resolution  before  the  services  are 
performed.  The  office  is  usually  filled  by  one  whose 
interest  in  the  company  is  supposed  to  be  a  motive  for 
executing  the  duties  of  the  office  without  compensation, 
and  this  presumption  prevails  unless  and  until  there 
exists  an  express  prearrangement  as  to  compensation.^"* 

Directors  usually  fix  their  own  compensation,  but 
their  act  is  not  necessarily  valid.  The  company  object- 
ing, they  cannot  bind  it  by  a  contract  made  by  them- 
selves with  reference  to  their  own  compensation  or  em- 
ployment.^ 

But  if  a  director  is  properly  employed  to  perform 
services  which  do  not  pertain  to  his  office  as  director, 
and  such  services  are  unquestionably  beyond  the  range 
of  his  official  duties,  he  is  entitled  to  such  compensa- 
tion 'as  has  been  agreed  upon  or  as  the  services  are 
reasonably  worth.^*' 

§  174.  Directors  preferring  themselves.'^'^ — The  right  of 
directors  who  are  at  the  same  time  creditors  of  the  cor- 
poration wliicli  is  contemplating  or  actually  insolvent, 
to  prefer  themselves,  either  by  recei\ang  payment  or 
security  for  their  debts,  to  the  exclusion  and  detriment 
of  the  other  creditors,  is  one  which  has  received  a 
double  interpretation  in  that  two  distinct  views  exist. 

64.  Holder  v.  La  Fayette,  etc.,  Co.,  71  111.  106;  Kilpatrick  v. 
Penrose,  etc.,  Co..  49  Pa.  St.  118;  Hall  v.  Vermont,  etc.,  Ry.  Co., 
28  Vt.  401;  New  York,  etc.,  Ry.  Co.  v.  Ketchum,  27  Conn.  170; 
Ogden  V.  Murray,  39  N.  Y.  202. 

65.  Gardner  v.  Butler,  30  N.  J.  Eq.  702;  Butts  v.  Wood,  37 
N.  Y.  317;  Jones  v.  Morrison,  31  Minn.  140. 

66.  Ibid.  And  see  also  Hodges  v.  Rutland,  etc..  Ry.  Co.,  29 
Vt.  220;  Illinois  Linen  Co.  v.  Hough.  91  111.  63.  Conf.  Pew  v. 
Gloucester  Bank,  130  Mass.  391;  Davis  v.  Memphis  City  Ry.  Co.. 
22  Fed.  883;  New  York,  etc.,  Ry.  Co.  v.  Ketchum,  27  Conn.  170. 

67.  See  excellent  summary  of  the  cases  generally,  13  Eng.  & 
Am.  Corp.  Cas.  (vol.  13)  N.  S.  252,  and  article  in  1  Am.  &  Eng. 
Corp.  Cas.,  1  N.  S.  xxxix. 


DIEECTOKS.  171 

That  the  entire  transaction  must  be  free  from  any 
suspicion  of  fraud  or  unfairness  is  the  unanimous  rule 
of  the  courts.  In  the  absence  of  fraud  or  unfairness, 
we  find  numerous  jurisdictions  allowing  such  prefer- 
ences, on  the  general  ground  that  there  exists  no  differ- 
ence between  the  debt  of  a  director  and  the  debt  of  a 
stranger  which  should  predicate  one  rule  in  respect  to 
the  director,  and  another  in  respect  to  the  stranger. 
The  United  States  courts  seemingly  allow  it,  but  will 
set  aside  the  transaction  if  it  be  sho^vn  to  be  unfair,^^ 
and  a  number  of  the  States  allow  preferences. 

On  the  other  hand,  the  right  is  denied  in  the  majority 
of  jurisdictions.  In  some  of  them,  the  rule  is  of  a 
statutory  nature.  But  in  absence  of  such  a  statute  the 
power  is  denied  on  one  or  more  of  several  grounds. 
"  The  law  is  that,  where  a  corporation  is  insolvent,  its 
capital  is  a  trust  fund  for  the  payment  of  its  debts. 
A  director,  creditor  upon  a  debt  theretofore  existing, 
cannot  take  advantage  of  his  superior  means  of  informa- 
tion to  secure  his  debt  as  against  other  creditors."  ^^ 

"  The  rule  in  equity  governing  such  cases,  *  *  * 
is  that,  independent  of  any  statute  relating  to  prefer- 
ence of  creditors'  by  an  insolvent  corporation,  the 
directors  of  a  corporation  upon  its  insolvency  become 
trustees  for  its  creditors,  and  cannot  use  their  own 
positions  of  trust  to  obtain  for  their  own  debts  an  in- 
ordinate share  of  the  assets."  ^° 

In  I^ew  York,  it  is  held  to  be  against  public  policy 
for  the  directors  to  prefer  themselves.'^^ 

The  fact  that  the  directors  are  sureties  of  claims 
which  have  been  preferred  in  favor .  of  the  stranger 
creditors  does  not  render  such  preferences  invalid,  in 

68.  Northwestern,  etc..  Co.  v.  Cotton,  etc.,  Co.,  70  Fed.  155; 
Jackson  v.  Ludelinof,  21  Wall.  616. 

69.  Hill  V.  Pioneer  Lumber  Co.,  113  K  C.  173. 

70.  V.  C.  Emorr  in  Temiant  v.  Apploljy,  X.  J.  Ch.  1898,  citing 
Montgomery  v.  Phillips.  ^^  X.  J.  Eq.  203. 

71.  Throop  V.  Hatch  Lith.  Co.,  125  N.  Y.  530. 


172     SUMMARY    OF   LAW   OF    PRIVATE   CORPORATIOXS. 

the  absence  of  statutory  restriction,  though  the  trans- 
action is  closely  scmtinizcd.'" 

§  175,  Liability  of  directors  for  failure  to  file  reports. 
—  Most  of  the  States  have  enacted  statutes  providing 
that  the  directors  or  officers  of  corporations  shall  file 
annually  a  report  of  the  financial  condition  of  the  com- 
pany, and  in  case  of  failure  to  do  so,  provide,  as  a 
penalty,  that  the  directors  or  officers  shall  be  person- 
ally liable  for  the  debts  of  the  concern.  These  reports 
must  be  verified  by  certain  officers.  The  statutes  are 
strictly  construed  and  must  be  strictly  followed  in  order 
to  relieve  the  directors  and  officers  from  liability.^^ 
In  1901,  the  State  of  Xew  York  changed  its  statute 
from  one  requiring  an  annual  report  from  directors  on 
penalty  of  personal  liability,  to  one  which  requires  a 
report  from  certain  officers  when  the  secretary  of  state 
shall  demand  it.'^* 

These  statutes  have  uniformly  been  held  to  be  penal 
in  their  nature  —  the  liability  not  surviving.'^^  But 
they  are  not  so  penal  in  their  nature  as  to  prevent  the 
director's  liability  outside  of  the  State  of  the  corpora- 
tion's citizenship."^  If  no  penalty  is  imposed,  the  direct- 
ors are  not  individually  liable. ^^ 

This  liability  —  being  penal  —  attaches  to  the  per- 
son, and  makes  the  directors  liable  only  for  debts  con- 
tracted while  they  are  in  office  and  continues  in  such 
office.     If  a  director  ceases  to  be  such,  he  avoids  debts 

72.  Corey  v.  Wadsworth,  118  Ala.  488;  First  Nat.  Bank,  etc. 
V.  Dovetail,  etc.,  Co..  143  Ind.  550;  Rollins  v.  Shaver,  etc.,  Co.,  80 
Iowa,  380:  Sehufeldt  v.  Smith,  131  Mo.  280. 

73.  Colorado,  etc.,  Co.  v.  Lenhart,  6  Colo.  App.  511;  Shanklin 
V.  Gray,  111  Cal.  88;  President,  etc.,  Manhattan  Co.  v.  Kalden- 
berjr,   105  X.  Y.   1. 

74.  New  York  Stock  Corporation  Law,  §  30,  as  amended  in 
1901. 

75.  .Tones  v.  Barlow,  G2  N.  Y.  202 ;  Bank  of  Saginaw  v.  Pierson, 
112  Mich.  410. 

76.  Davis  v.  Mills,  99  Fed.  39. 

77.  Margage,  etc.,  Co.  v.  Ziegler,  9  Pa.  Sup.  Ct.  438. 


OFFICERS  AND  AGENTS.  173 

contracted  subsequent  to  bis  leaving  tbe  corporation 
even  thougb  tbe  default  continues;  for  a  director  can- 
not be  beld  liable  for  tbe  subsequent  failure  of  tbe 
otber  directors/^ 

Tbe  creditor's  rigbt  accrues  at  once  upon  tbe  failure 
to  file  tbe  report  —  for  tbe  statute  does  not  require 
tbe  creditor  to  exbaust  legal  remedies  against  tbe  cor- 
poration —  and  judgment  against  tbe  corporation  is 
not  a  condition  precedent  to  sucb  rigbt  of  actionJ^ 

Tbe  liability  is  one  wbicb  is  joint  and  several,  and 
may  be  brougbt  against  one  or  all  of  tbe  directors  in- 
dividually.^° 

Officers  akd  Agents  —  Other  than  Directors. 

§  176.  Appointment. —  It  bas  already  been  observed 
tbat  "witbin  tbe  limits  of  its  corporate  powers  a  cor- 
poration may  carry  on  its  business,  make  contracts,  and 
transact  business  generally  in  tbe  same  manner  tbat  an 
individual  may  do.  Under  sucb  circumstances  tbe  ap- 
pointment of  officers  and  agents  may  be  made  in  writing 
and  under  seal,  if  tbe  statute  of  frauds  require  it,  or 
if  not,  tbe  appointment  may  be  oral,  or  tbe  cor]:)ora- 
tion  may  accept  tbe  benefit  of  services  rendered  witbout 
any  formality  and  in  tbis  way  be  bound  by  tbe  doc- 
trine of  estoppel  and  denied  tbe  rigbt  to  disclaim.^^ 

As  a  usual  tbing,  tbe  by-laws  provide  tbe  metbod 
■and  manner  of  tbe  appointment  of  officers  and  otber 
agents,  and  also  prescribe  tbeir  duties  and  powers. 
Directors  usually  elect  tbe  officers,  fix  tbeir  salaries, 
and  wbere  tbe  by-laws  are  silent  as  to  tbeir  powers  and 
duties,  tbe  directors  prescribe  tbem.  Agents,  otber 
tban  officers,  may  be  appointed  eitber  by  tbe  officers 

78.  Bank  of  Saginaw  v.  Pierson,  112  Mich.  410;  Sinclair  v. 
Fuller.  158  N.  Y.  608. 

79.  Camp.  INIf?.  Co.  v.  Reamer.  14  App.  Div.   (N.  Y.)   408. 

80.  Fitzgerald  v.  Weidenbeck,  76  Fed.  695. 

81.  Sherman  v.  Fitch,  98  Mass.  59. 


17-i      SUMMAKY    OF    LAW    OF    PKIVATE   CORPORATIONS. 

or  by  the  directors,  depending  mucli  upon  the  scope 
of  authority  given  to  them,  though  their  appointment 
is  usually  made  by  the  directors. 

§  177.  Powers  of — in  general. —  The  law  of  agency 
applies  to  corporate  officers;  and  if  an  officer  is  held 
out  to  the  world  as  having  certain  authority  by  being 
allowed  to  exercise  such  authority  for  a  considerable 
time,  the  corporation  is  liable  for  his  acts  within  the 
scope  of  such  authority,  although  the  authority  had 
never  been  expressly  conferred  upon  him.^" 

"  The  fact  that  officers  of  a  corporation,  in  dealing 
with  a  third  person  within  their  apparent  powers,  failed 
to  conform  to  the  rules  made  for  their  government  by 
the  cor[Doration,  does  not  'affect  a  third  party  dealing 
with  them  in  good  faith,  and  without  knowledge  of 
any  irregularity."  ^^ 

"  The  officers  of  a  corporation  cannot  bind  it  by  any 
unlawful  act,  nor  by  any  ^act  not  clearly  within  the 
line  of  the  business  of  the  corporation,  nor  any  act 
which  is  not  within  the  scope  of  their  official  author- 
ity." 84 

"  The  proper  officers  and  directors  and  trustees,  duly 
elected  or  appointed  by  a  corporation,  are  authorized 
to  exercise  all  the  powers  of  the  corporation  which  its 
charter  imposes,  or  the  usual  course  of  business  in  like 
institutions  give  to  such  officers.  It  follows  therefore 
that  a  corporation  is  bound  by  the  acts  of  such  officers 
done  within  the  range  of  their  official  character."  ^^ 

"Where  a  party  deals  with  a  corporation  in  good 
faith,  and  the  transaction  is  not  ultra  vires,  and  he  is 
unaware  of  any  defect  of  authority  or  other  irregularity 
on  the  part  of  those  acting  for  the  corporation,  and 

82.  Commercial  ]Mutual,  otc,  Ins.  Co.  v.  Union,  etc.,  Ins.  Co., 
19  How.    (U.  S.I   322. 

83.  Ashley  Wire  Co.  v.  Illinois  Steel  Co.,  164  111.  149   (1898). 

84.  P.ank  of  Metropolis  v.  -Jone.s,  8  Pet.   (U.  R.)    12. 

85.  Credit  Co.  v.  Howe,  etc.,  Co.,  54  Conn.  357. 


OFFICEKS    A2s'D    AGENTS.  175 

there  is  nothing  to  excite  suspicion  of  such  defect  or 
irregularity,  the  corporation  is  bound  by  the  contract, 
although  such  defect  or  irregularity  in  fact  exists.  If 
the  contract  can  be  valid  under  any  circumstances,  an 
innocent  party  in  such  a  case  has  a  right  to  presume 
their  existence,  and  the  corporation  is  estopped  to  deny 
them."  ^^ 

All  parties  dealing  with  the  agents  of  corporations 
are  conclusively  presumed  to  be  familiar  with  the  pro- 
visions of  the  charter  or  by-laws  as  to  the  powers  of 
such  agents.  "  The  principle,  however,  that  persons 
dealing  with  the  officers  of  a  corporation  are  charged 
with  notice  of  the  authority  conferred  upon  them,  and 
of  the  limitations  and  restrictions  upon  it  contained 
in  the  charter  and  bj-laws,  is  too  well  established  to  re- 
quire to  be  supported  by  a  citation  of  authorities,  and 
we  cannot  assent  to  the  proposition  that  there  is  any 
grant  of  power  in  the  name  by  which  an  officer  is 
designated,  especially  when  the  authority  given  is  speci- 
fied in  the  by-laws."  ^^  It  is  accordingly  the  general 
inile  that  persons  dealing  with  the  agents  or  officers  of 
a  corporation  are  chargeable  with  notice  of  the  extent 
of  their  authority,^®  though  we  have  seen  that  the 
general  principles  of  agency  will  apply  and  bind  the 
corporation  in  the  absence  of  notice  of  any  defect  of 
authority  or  other  irregularity. 

§  178.  Right  to  compensation. —  Officers  and  agents 
of  a  corporation  may  recover  of  it  for  services  rendered 
as  such  under  the  same  circumstances  as  would  permit 
a  recovery  against  a  partnership  or  an  individual.^^ 
Officers  who  are  at  the  same  time  directors  or  tnistees 
must  show,  however,  that  their  claims  are  for  services 

86.  Merchants'  Bank  v.  State  Bank.  10  Wall.   (U.  S.)    044. 

87.  Adriance  v.  Roome.  52  Barb.   (N.  Y.)   390 

88.  Alexander  v.  Cauldwell,  S3  N.  Y.  485;  Relfe  v.  Rundel,  103 
U.  S.  222. 

89.  Feiton  v.  West  Iron  Minin?  Co.,  16  Mont.  81   (1896). 


176      SUMMAKY    OF   LAW    OF    PKIVATE    COlirOKATIONS. 

performed  outside  of  their  ordinary  duties  as  directors, 
and  under  circumstances  sutiicient  to  show  that  the 
directors  and  other  officers  as  well  as  the  corporation 
understood  that  such  services  were  to  be  paid  for.^° 
Officers  have  no  power  to  vote  themselves  salaries.^^ 
§  179.  Secret  profits. —  Officers,  directors,  or  agents 
have  no  right  or  authority  to  stipulate  for  a  commission 
or  bonus  to  be  paid  them  by  a  person  with  whom  they 
entered  into  a  contract  in  behalf  of  the  corporation.  If 
they  do  so,  they  are  liable  to  the  corporation  for  the 
profits  made  by  them.^^ 

§  180.  liability  of  officers,  etc.,  for  false  representa- 
tions.—  The  directors  or  officers  of  a  corporation  who 
make  false  statements  of  material  facts,  misrepresenta- 
tions as  to  solvency,  and  the  like,  the  natural  tendency^ 
of  which  is  to  deceive  the  public,  are  liable  for  the 
damages  sustained  by  one  who  relies  on  such  state- 
ments and  is  misled  and  suffers  damages  in  conse- 
nt 
quence. 

But  "  the  mere  fact  of  being  a  director  and  stock- 
holder will  not  make  one  liable  for  the  frauds  and  mis- 
representations of  the  active  managers  of  a  corporation, 
some  knowledge  and  participation  in  the  act  complained 
of  as  being  fraudulent  must  be  brought  home  to  the 
person  charged.  It  is  only  where  a  director  lends  his 
name  and  influence  to  promote  a  fraud,  or  is  guilty  of 
some  violation  of  law,  or  some  other  mismanagement, 
that  he  is  pei-sonally  liable."  ^^ 

§  181.  General  manager. —  The  general  manager  of  a 
corporation,  appointed  as  such  by  the  stockholders  or 
directors,  is  presumed  to  have  authority  to  manage  the 

90.  Idem. 

91.  Hardee  v.  Stmset  Oil  Co.,  56  Fed.  51. 

92.  Porrv  v.  Tuscaloosa,  etc.,  Co.,  93  Ala.  364;  Higpins  v. 
Lansinph,  154  111.  301. 

93.  :\rorrran  v.  Rkiddv,  62  N.  Y.  319;  Bank  of  Montreal  v. 
Thnver.  2  :\rcCrarv   (U.  S.  C.I.  1. 

94.  Arthur  v.  Griswold,  55  N.  Y.  400. 


GENEEAL    MANAGES.  177 

business  for  which  the  corporation  is  chartered.  TTi.^ 
acts  are  not  invalid  merely  because  certain  special  and 
enumerated  powers,  not  excluding  others,  are  conferred 
upon  Mm  by  the  by-laws.^^  "  The  powers  of  general 
managers  and  superintendents  are  much  similar  to  those 
of  presidents  of  corporations."  ^^  Accordingly,  in  the 
absence  of  express  restrictions  upon  his  powers,  with 
actual  or  constructive  notice  thereof  to  persons  dealing 
with  him,  he  has  implied  authority  to  make  any  con- 
tract or  do  any  other  act  which  is  necessary  or  ap- 
propriate to  the  ordinary  business  of  the  corporation.^^ 
The  extent  of  his  powers  will  depend  much  upon  the 
terms  of  his  appointment,  and  if  his  management  is 
subject  to  the  direct  control  of  the  directors  or  superior 
officers  or  agents,  his  acts,  aside  from  the  particular 
duties  intiTisted  to  him,  must  receive  their  approval. 
If  he  be  intrusted  with  the  entire  business  management 
and  control,  he  may  borrow  money  for  the  purposes  of 
the  corporation,^^  though  he  has  not  generally  the 
power  to  execute  negotiable  paper  for  the  corporation, 
unless  the  scope  of  his  employment  give  him  that 
authority.^  General  management  v^dll  include  all  the 
powers  and  duties  necessary  to  the  execution  of  the 
ordinary  business  of  the  corporation,  and  in  doing  this 
he  may  enter  into  obligations  and  make  such  contracts 
as  come  within  the  scope  of  the  ordinary  business.  As 
a  rule,  he  has  no  power  to  lease,  mortgage,  pledge,  or 
otherwise  dispose  of  the  real  or  personal  property,^ 
though  such  power  could  unquestionably  be  given  him 

95.  Fay  v.  Noble,  12  Ciish.   (Mass.)   1. 

96.  Beach  on  Corporations,  §  209. 

97.  Rathbun  v.  Snow,  123  N.  Y.  343. 

98.  Matson  v.  Alley,  141  111.  284. 

99.  Railway,  etc..  Co.  v.  Lincoln  Xat.  Bank,  82  Hun   (X.  Y.), 
8:  Rathbim  v.  Snow.  123  N.  Y.  343. 

1.  England  v.  Dearborn,  141  Mass.  590;  Titus  v.  Cairo,  etc., 
Ry.  Co.,  37  N.  J.  L.  98. 

12 


178     SUMMARY    OF   LAW   OF   PEIVATE   CORPORATIONS. 

expressly.  Nor  can  he  make  an  assignment  of  the  prop- 
erty for  the  benefit  of  creditors.^ 

§  182.  The  president —  "  In  the  absence  of  legisla- 
tive enactment  or  provision  made  in  the  by-laws,  cor- 
porations usually  act  through  their  president,  or  those 
representing  him.  He  being  the  legal  head  of  the  body, 
when  an  act  is  performed  by  him  the  presumption  will 
be  indulged  that  the  act  is  legally  done,  and  is  binding 
upon  the  body;  and,  as  a  general  rule,  in  the  absence 
of  the  president,  or  when  a  vacancy  occurs  in  the  office, 
the  vice-president  may  act  in  his  stead,  and  perform 
the  duties  which  devolve  upon  the  president."  ^ 

Just  what  the  duties  of  the  president,  as  well  as  those 
of  other  officers  are,  will  depend  much  upon  the  nature 
of  the  business  transacted  by  the  corporation,  and  fur- 
ther upon  the  authority  delegated  to  him  by  the  board  of 
directors,  as  well  as  defined  by  the  by-laws.  It  is  e\a- 
dent  that  either  one  or  both  may  invest  him  with 
authority  to  manage  the  company.  And  this  may  be 
done  either  expressly  by  resolution  or  by  acquiescence 
in  the  course  of  the  dealings.  Contracts  which  other- 
Avise  would  be  ultra  vires  will  be  deemed  to  be  within 
the  power  of  the  president  when  the  corporation  has 
acquiesced  in  a  course  of  dealing  which  clothes  him 
with  apparent  authority.'* 

Some  jurisdictions  hold  that  the  president  has  no 
more  power  than  any  other  director,  save  that  he  is 
the  presiding  officer  of  the  board."^  This  is  not  the 
weight  of  authority  however. 

2.  Norton  v.  National  Bank,  102  Ala.  420;  Hadden  v.  Linville, 
86  Md.  210. 

3.  Smith  V.  Smith,  C2  111.  493 ;  Titus  v.  Railway  Co.,  37  N.  J. 
L.  98. 

4.  Mt.  Sterling,  etc.,  Ry.  Co.  v.  Looney,  1  Met.  (Ky.)  550.  See 
also  Kraft  v.  Freeman,  etc.,  Co.,  87  N.  Y.  G28 ;  Dougherty  v. 
Hunter,  54  Pa.  St.  380. 

5.  Chicago,  etc.,  Ry.  Co.  v.  James,  22  Wis.  187;  Walworth,  etc., 
Bank  v.  Farmers'  Loan,  etc.,  Co.,  14  id.  351;  Titus  v.  Cairo,  etc., 
Ry.  Co.,  37  N.  J.  L.  98;  Bliss  v.  Kaweah  Canal,  etc.,  Co.,  65  Cal. 
502. 


OFFICEES   OF   THE  CORPORATION.  179 

§  183.  Other  officers —  The  vice-president,  secretary, 
and  treasu:.*er  are  usually  confined  in  their  operations 
and  duties  by  either  the  control  of  the  directors  or  the 
by-laws.  Authority  may  be  conferred  upon  them  which 
extends  beyond  the  ordinary  duties  of  such  officers,  and 
where  these  officers  exceed  their  authority  and  the  act  is 
acquiesced  in,  and  the  benefit  taken  advantage  of  by 
the  corjDoration,  the  corjioration  will  be  bound  in  the 
same  way  as  stated  above.  But  generally,  no  authority 
will  attach  to  any  of  these  officers  by  virtue-  of  their 
office,  save  those  ordinary  duties  common"  to  it. 

§  184.  Knowledge  of  officers  —  Notice  to  the  corpora- 
tion.—  The  principles  of  agency  apply  here,  and  hold 
that  knowledge  of  an  agent  binds  the  principal  the  same 
as  if  the  principal  had  known  it,  and  it  be  a  transaction 
in  which  the  agent  represents  the  principal.  "  In  order 
for  the  knowledge  of  an  officer  to  be  notice  binding 
upon  the  corporation,  it  must  be  knowledge,  coming  to 
him  while  he  is  concerned  for  the  corporation,  and  in 
the  course  of  the  very  transaction  which  is  the  subject 
of  the  suit,  or  so  near  before  it  that  he  must  be  pre- 
sumed to  recollect  it."  ^ 

But  in  a  transaction  where  a  corj^orate  officer  or 
agent  acts  for  himself,  and  deals  with  the  corporation 
as  if  he  had  no  official  relations  with  it,  the  corpora- 
tion is  not  charged  with  his  knowledge.^ 

§  185.  Revocation  of  agent's  powers. —  The  rules  of 
agency  also  apply  here,  and  the  power  and  authority  of 
the  agent  exists  only  at  the  will  of  the  principal.  In 
a  corporation  the  principal  is  the  stockholders,  and  all 
others  are  agents.     The  directors  and  managing  agents 

6.  Conger  v.  Chicago,  etc.,  Ry.  Co.,  24  Wis.  157;  :Miller  v.  Illi- 
nois Cent.  Rv.  Co.,  24  Barb.  (X.  Y.)  312;  Smith  v.  South  Royal- 
ton  Bank,  32  Vt.  341. 

7.  Bowditch  V.  Xew  Enirland,  etc..  Ins.  Co..  l-il  ^Tqs«.  20-1; 
Barnes  v.  Trenton  Gas  Light  Co.,  37  N.  J.  Eq.  33 ;  La  Farge,  etc., 
Ins.  Co.  V.  Bell,  22  Barb.   (X.  Y.)   54. 


180     SUMMARY    OF    LAW    OF    PKIVATE    CORPOEATIOIS'S. 

have  authority  to  revoke  the  powers  and  authority  of 
agents  appointed  by  theui,  but  they  have  no  authority 
to  revoke  the  powers  of  an  agent  who  is  appointed  by 
the  vote  of  the  shareholders,  or  whose  office  is  fixed 
and  regulated  by  the  charter.  Xor  can  they  expel  an 
individual  director  —  his  appointment  having  been 
made  by  the  shareholders.^ 

§  186.  Removal  of  directors. —  Statutes  have  in  some 
cases  provided  means  for  the  removal  of  directors,  but 
generally  speaking  the  power  to  remove  does  not  exist, 
even  in  a  majority  of  shareholders  at  a  shareholders' 
meeting,  if  their  term  of  office  is  prescribed  by  the 
charter  or  by-laws  of  the  company.^  The  charter  or 
by-laws  may  pro\ade  for  removal  "  for  negligence,  mis- 
conduct in  office,  or  other  reasonable  cause."  Under 
such  circumstances,  "  the  expression  '  reasonable  cause  ' 
does  not  refer  to  such  a  cause  as  would  be  deemed 
reasonable  in  a  court  of  justice,  but  only  to  such  a  cause 
as  is  deemed  reasonaljle  by  the  shareholders,  and  the 
discretion  of  the  shareholders  in  detennining  what  is 
reasonable  cannot  be  interfered  with,  in  the  absence 
of  direct  fraud."  ^"^ 

"  Individual  stockholders  cannot  question,  in  judicial 
proceedings,  the  corporate  acts  of  directors,  if  the  same 
are  within  the  powers  of  the  corjioration  and  in  further- 
ance of  its  purposes,  are  not  unlawful  or  against  good 
morals,  and  are  done  in  good  faith,  and  in  the  exercise 
of  an  honest  judgment.  Questions  of  policy  of  manage- 
ment, of  expediency  of  contracts,  of  action,  of  adequacy 
of  consideration  not  grossly  disproportionate,  of  lawful 
appropriation  of  corporate  funds  to  advance  corporate 
interests  and  the  like,  are  left  solely  to  the  honest  de- 

8.  People  V.  Throop,  12  Wend.    (N.  Y.)    183. 

9.  But  see  Thompson  on  Corporations.  §  3972. 

10.  Morawetz.  §  .542.  citincr  Tnderwick  v.  Snell,  2  MacN.  &  Gr. 
216.    See  also  Re  The  A.  A.  Griffing  Iron  Co.,  63  N.  J.  L.  168. 


REMOVAL    OF   DIRECTORS.  181 

cision   of  the  directors,   if  their  powers  are  without 
limitation,  and  free  from  restraint."  ^^ 

"  It  is  clear  that  a  court  of  equity  has  no  jurisdiction 
to  remove  an  oiScer  of  a  corporation  from  an  office  of 
which  he  has  possession,  or  to  declare  the  forfeiture  of 
such  office.  Its  decree  vnll  not,  like  the  judgment  of 
a  court  of  law,  operate  in  rem,  and  remove  or  oust  any 
one  from  an  office  which  he  in  fact  holds.  When  the 
object  is  simply  to  deteiTtiine  the  regularity  of  an  elec- 
tion, or  to  declare  an  office  to  which  any  one  has  been 
duly  elected  forfeited,  a  court  of  law"  is  the  only  com- 
petent and  proper  tribunal."  Officers  and  directors 
may  be  restrained  in  actual  or  threatened  wrongs,  but 
courts  of  equity  will  not  remove  or  restrain  except  in 
case  of  absolute  necessity. 

11.  Ellerman  v.  Chicago,  etc.,  Co.,  49  N.  J.  Eq.  217. 


4 


CHAPTER  IX. 

Transfer. 

(a)  Lien  ox  Stock. 

(b)  Gift  of  Stock. 

(c)  Transfer  in  General. 

(a)  Lien  on  Stock. 

§  187.  No  lien  at  common  law —  Liens  upon  stock  for 
debts  due  the  corporation  when  they  exist  result  en- 
tirely from  statutory  provisions,  or  from  a  by-law  en- 
acted by  the  corporation.  At  common  law,  a  corpora- 
tion has  no  lien  on  the  shares  of  its  shareholders  for  an 
indebtedness  to  it.^ 

§  188.  How  lien  is  created. —  The  lien  is  frequently 
created  by  statute,  however,  either  in  the  form  of  a 
provision  in  the  charter,  or  in  the  general  laws.  By 
weight  of  authority,  tliere  is  no  doubt  as  to  the  au- 
thority of  the  legislature  to  create  such  a  lien.^  There 
is  some  conflict  among  the  authorities  as  to  the  right 
of  a  coi^Doration  to  create  such  a  lien  by  a  by-law,  in 
the  absence  of  statutory  authority.  The  weight  of 
authority  is  in  favor  of  corporate  power  to  enact  such 
a  by-law  which  will  bind  all  persons  dealing  in  the  com- 
pany's stock.^ 

1.  Driseoll  v.  West  Bradley,  etc.,  Co.,  59  K  Y.  96;  Merchants' 
Bank  v.  Shouse,  102  Pa.  St.  488;  Van  Sands  v.  Middlesex,  etc., 
Bank,  2G  Conn.  144;  Massachusetts  Iron  Co.  v.  Hooper,  7  Cush. 
(Mass.)    is;]. 

2.  National  Bank  v.  Watsontown  Bank,  10.")  U.  S.  217:  Pitts- 
burgh, etc.,  Rv.  C'o.  V.  Clarke.  20  Pa.  St.  140;  First  Nat.  Bank  v. 
Hartford,  etc.",  Ins.  Co.,  45  Conn.  22;  Leggett  v.  Bank,  24  N.  Y. 
283;   Sabin  v.  Bank,  21  Vt.  353. 

3.  People  V.  Crockett,  0  Cal.  113;  Lockwood  v.  .Mechanics'  Nat. 
Bank,  9  R.  I.  308;  Brent  v.  Bank  of  Washinirton.  10  Pet.  (35 
U.  S.)  590;  Young  v.  Vough,  23  N.  J.  Eq.  325;  :Mechanics'  Bank 
V.  Merchants'  Bank,  45  Md.  513. 

[182] 


LIENS    ON    STOCK.  183 

"  There  is,  nevertheless,  strong  authority  for  the 
rale  that  such  a  by-law  cannot  create  a  lien  on  the  stock, 
so  as  to  bind  a  bona  fide  purchaser,  or  other  persons 
into  whose  hands  the  shares  may  come,  to  whom  actual 
knowledge  of  the  by-law  cannot  be  imputed."  * 

§189.  National  banks — Xo  statute  exists  in  the 
United  States  laws  giving  national  banks  a  lien  upon 
stock  for  debts  due  by  stockholders,  and  it  is  inferred 
that  such  power  shall  not  be  given  to  banks.^ 

§  190.  What  statutory  provisions  in  themselves  create 
a  lien — • "  When  the  articles  of  association  of  a  bank 
provide  that  no  shareholder  shall  be  permitted  to  trans- 
fer his  shares  or  receive  a  dividend  thereon,  who  shall 
owe  the  bank  a  debt  then  due,  unless  by  consent,  and 
authority  is  given  whenever  such  a  debt  is  past  due  to 
sell  the  stock  and  apply  the  proceeds  to  pay  the  debt, 
these  provisions  taken  together  create  a  lien  upon  the 
stock  in  favor  of  the  bank  for  the  debts  of  the  holder."  ^ 

§  191.  Statutes  which  authorize  corporations  to  create 
liens. —  In  those  jurisdictions  where  it  is  held  that  a 
corporation  has  not,  mthout  statutory  authority,  the 
power  to  enact  a  by-law  creating  a  lien  on  its  stock,  the 
principal  question  is,  what  language  in  the  statute  or 
charter  is  necessary  to  create  such  authority?  The 
power  granted  "  to  make  by-laws  not  inconsistent  with 
the  laws  of  this  State  for  the  organization  of  the  com- 
pany, for  management  of  its  property,  the  regulation  of 
its  affairs,   and  for  carrying  on  all  kinds  of  business 

4.  Cook  on  Stockholders,  §  522 ;  Driseoll  v.  West  Bradley,  etc., 
Co.,  59  N.  Y.  96:  Merchants'  Bank  v.  Shouse,  102  Pa.  St.  488; 
Billiard  v.  National  Eagle  Bank,  IS  Wall.  (85  U.  S.)  589.  See 
also  Carroll  v.  Mullanphv,  etc..  Bank,  8  Mo.  App.  249;  vSteamship 
Dock  Co.  V.  Heron's  Adinr.,  52  Pa.  St.  280. 

5.  First  Nat.  Bank  v.  Lanier.  11  Wall.  (78  U.  S.)  369;  Bullard 
V.  National  Eagle  Bank,  IS  id.  589 ;  Conklin  v.  Second  Nat.  Bank, 
45  N.  Y.  055. 

6.  Arnold  v.  Suffolk  Bank,  27  Barb.  (N.  Y.)  424.  To  the  same 
effect  see  Derring  v.  Ilibernian,  etc..  Co.,  16  W.  R.  578;  Van 
Sands  v.  Middlesex,  etc..  Bank,  2G  Conn.  144;  Jennings  v.  Bank 
of  California,  79  Cal.  323:  but  see  Lockwood  v.  Mechanic's  Nat. 
Bank.  9  R.  T.  308:  In  re  Dnnkerson.  4  Bi^s.  (V.  S.  C.)  2-?7.  and 
Bath  Sav.  Inst.  v.  Sagadahoc,  etc.,  Bank,  89  ]\Ie.  500,  contra. 


184     SUMMARY   OF   LAW   OF   PRIVATE    CORPORATIONS. 

within  the  objects  and  purposes  of  the  company  "  will,  it 
has  been  held,  give  the  corporation  the  right  to  enact  a 
bv-law  declaring  in  effect  that  no  transfer  of  stock  shall 
be  made  on  the  books  of  the  company  until  all  payments 
"  of  all  indebtedness  due  to  the  bank  by  the  person  in 
whose  name  the  stock  stands  on  the  books  of  the  bank."^ 

§  192.  What  by-laws  create  the  lien. —  A  by-law  pro- 
viding that  no  transfer  shall  be  made  without  the  con- 
sent of  the  board  of  directors  by  any  stockholder  who 
shall  be  liable  to  the  bank,  either  as  principal  debtor 
or  otherwise,  will  create  such  a  lien.^ 

But  if  the  by-law  is  enacted  subsequently  to  the  trans- 
fer it  cannot  affect  the  rights  of  the  parties  to  that 
transfer,^  nor  will  it  affect  the  judgment  creditors  of 
the  stockholder.^^ 

§  193.  Notice  of  lien  and  by-laws. —  Persons  dealing 
with  a  corporation  are  bound  to  take  notice  of  any  pro- 
visions contained  in  its  charter  or  in  a  general  law  con- 
ferring liens  upon  stock.-'^ 

But  the  existence  of  a  by-law  pro\ading  for  such  a 
lien  is  not  enough  to  charge  the  purchaser  vdth  notice.^^ 
It  is  self  evident  that  if  a  purchaser  have  notice  of  such 
lien  he  takes  the  stock  subject  to  the  lien  and  cannot 
have  it  transferred  to  him  Avithout  first  discharging  the 
lien. 

§  194.  Shares  covered  by  the  lien. —  The  lien  attaches 
not  only  to  shares  of  which  the  shareholder  has  the 

7.  Pendergast  v.  Bank  of  Stockton,  2  Sawy.  (U.  S.  C.  C.)  108; 
Lockwood  V.  Mechanics'  Bank,  9  R.  I.  308 :  Spurlock  v.  Pacific  Ry. 
Co.,  61  Mo.  319;  Knight  v.  Old  Nat.  Bank,  3  Cliff.  (U.  S.  C.  C.) 
429.  Contra.  Bank  of  Attica  v.  Manufacturers'  Bank,  20  X.  Y. 
501;  Driscoll  v.  West  Bradley,  etc..  Co..  59  id.  96. 

8.  In  re  Dimkerson.  4  Biss.    {V.   S.  C.)    227. 

9.  People  V.  Crockett,  9  Cal.   112. 

10.  Brvan  v.  Carter,  22  La.  Ann.  98. 

11.  Bishop  V.  Globe  Co.,  135  Mass.  132;  Brent  v.  Bank  of 
Washington,  10  Pet.  (35  U.  S.)  596;  McReady  v.  Rumsey,  6  Diier, 
574. 

12.  Anglo-California  Bank  v.  Grangers'  Bank.  63  Cal.  359; 
Bank  of  Hollv  Sprinfrs  v.  Pinson,  58  Miss.  421 ;  Driscoll  v.  West 
Bradley,  ete.,^Co.,  59  N.  Y.  96. 


LIENS  ON  STOCK.  185 

legal  title,  but  also  where  he  has  the  beneficial  title 
only.^^  So  to  where  shares  stand  in  name  of  fictitious 
party ;^^  to  shares  obtained  by  forgery ;^^  to  shares 
standing  in  name  of  trustee;^^  and  to  pledgee  who  has 
notice  of  such  lien.^^  But  it  does  not  attach  to  a 
pledgee  who  has  no  notice  of  the  lien.^^ 

The  lien  also  attaches  to  dividends.^^ 

§  195.  Debts  secured  by  the  lien. —  This  lien  is  not 
limited  to  indebtedness  for  calls  or  assessments  on  the 
particular  shares  which  are  desired  to  be  transferred, 
but  enables  the  company  to  refuse  to  transfer  if  the 
member  is  indebted  to  them  on  any  account  whatever.^'' 
A  general  indebtedness  by  note  comes  within  the  pro- 
hibition,^^ and  this  is  true  although  the  note  is  not  yet 
payable.^^  It  even  extends  to  the  shares  of  an  in- 
dividual who  is  a  partner  in  a  concern  which  is  indebted 
to  the  bank  ^^  and  takes  in  the  stock  held  by  a  trustee 
who  is  indebted  to  the  corporation,^*  unless  the  corpora- 
tion knew  the  shareholder  held  the  stock  as  trustee.^^ 

The  corporation  is  entitled  to  a  lien  upon  the  stock 
for  debts  accruing  after  the  date  of  the  transfer,  but 
before  it  has  received  notice  thereof.^^    But  after  the 

13.  Planters'  Ins.  Co.  v.  Selma  Bank,  63  Ala.  585. 

14.  Stebbins  v.  Phoenix  Ins.  Co.,  3  Paige  Ch.  350. 

15.  Mt.  Holly  Paper  Co.'s  Appeal,  99  Pa.  St.  513. 

16.  Young  V.  Vough,  23  N.  J.  Eq.  325. 

17.  Bank  of  Atchinson  v.  Durfee,  118  Mo.  431. 

18.  Idem. 

19.  Bates  v.  X.  Y.  Ins.  Co..  3  Johns.  Cas.  (X.  Y.)  238;  Hnvne  v. 
Dandeson,  2  Exch.  741.  Contra,  Merchants'  Bank  v.  Shouse, 
102  Pa.  St.  488;  Brent  v.  Bank  of  Washington,  2  Cranch  (U.  S.  C.i, 
517. 

20.  Ex  parte  Stringer.  L.  B..  9  Q.  B.  Div.  4''fi. 

21.  Cunningham  v.  Alabama  Life  Ins.,  etc.,  Co.,  4  Ala.  593. 

22.  Idem.  See  also  Pittsbursh.  etc..  Rv.  Co.  v.  Clarke.  29  Pn. 
St.  146:  Leggett  v.  Bank  of  Sing  Sins:.  24  N.  Y.  283. 

23.  Arnold  v.  Suffolk  Bank.  27  Barb.  424;  Planters,  etc.,  Ins. 
Co.  V.  Selma  Bank.  63  Ala.  585. 

24.  London,  etc..  Bank  v.  Brockleband.  L.  R.,  21  Ch.  Div.  302. 

25.  Mechanics'  Bank  v.  S-ton.  1  Pet.   (20  V.  S.  i   290. 

26.  Sabin  v.  Bank  of  Woodstock,  21  Vt.  353;  Piatt  v.  Bir- 
mingham, etc.,  Co.,  41  Conn.  255. 


186     SUMMAKY    OF   LAW   OF   PRIVATE    COKPORATIOXS. 

Stockholder  has  divested  himself  of  his  title  to  the 
stock,  by  sale,  gift,  or  pledge,  and  the  corporation  has 
notice  thereof,  it  has  no  right  to  extend  credit  to  him 
upon  the  faith  of  this  licn.^^ 

§  196.  Debts  due  on  stock  account. —  The  general  rule 
is  that  the  liability  to  pay  for  the  amount  of  stock  sub- 
scribed is  an  indebtedness  within  the  meaning  of  the 
statute  or  provision  in  charter  or  by-laws,  and  even 
though  calls  have  not  been  made  at  the  time  of  trans- 
fer, the  lien  holds  good.*^ 

The  jurisdictions  are  divided,  however,  as  to  the  ques- 
tion whether  the  lien  attaches  to  all  the  shares  the 
shareholder  owns,  or  only  such  as  remain  unpaid  for. 
In  Xew  York  the  former  is  the  rule,  but  it  is  not  the 
rule  in  other  jurisdictions.^ 

§197.  Waiver  of  lien. —  A  coi-poration  may  waive 
its  lien  upon  the  shares  of  a  stockholder  indebted  to  it. 
The  failure  to  assert  the  lien  before  transfer,  when 
notice  is  given  of  such  transfer,  and  the  issue  of  a  new 
certificate  to  the  transferee,  even  though  the  certifi- 
cate contain  terms  making  the  shares  transferable  only 
after  the  holder  pays  all  his  liabilities  to  said  corpora- 
tion, amounts  to  a  waiver."^ 

Tho  fact  that  tlie  corporation  takes  from  the  debtor 
other  security  does  not  thereby,  without  affirmative 
evidence  to  the  contrary,  waive  such  lien.^* 

Estoppel  will  prevent  the  enforcement  of  the  lien  in 

27.  Bank  of  America  v.  McNeil,  10  Bush  (Ky.),  54;  Nesmith 
V.  Washington  Bank,  0  Pick.  (Mass.)  324.  But  see  Bradford, 
etc..  Co.  V.  EripsTS,  L.  R.,  31  Ch.  Div.  19. 

28.  Pittsburgh,  etc,  Ry.  Co.  v.  Clarke,  29  Pa.  St.  146;  Mc- 
Readv  v.  Rumsev,  0  Duer    (N.  Y.),  .574. 

29.  Stfbbins  v.  Phrrnix  Fire  Ins.  Co.,  3  Paige  Ch.  (X.  Y.)  3.50. 
But  see  Hall  v.  U.  S.  Ins.  Co.,  .5  Gill  (Md.),  484;  Hubbersty  v. 
jManoliostcr.  etc.,  Rv.  Co.,  L.  R..  2  0.  B.  471. 

30.  Cecil,  etc..  Bank  v.  Watsonto\vn  Bank.  10.5  U.  S.  217;  In  re 
Hoy  Lake  Ry.  Co.,  L.  R.,  9  Ch.  2.57;  Des  Moines,  etc.,  Co.  v.  Des 
Moinos  Nat."  Bank,  97  Iowa,  OOS ;  Hall  v.  Pine  River  Bank,  45 
N.  H.  .'^00 :  Hiirgs  v.  Northern,  etc.,  Co.,  L.  R.,  4  Ex.  387. 

31.  Union  Bank  v.  Laird,  2  Wheat.    (15  U.  S.)   390. 


1 


LIENS    ON    STOCK.  187 

cases  where  the  corporation  represents  the  stock  as 
free  and  clear  of  liens,  and  a  party  acting  under  those 
representations  is  induced  to  purchase  such  stock.^^ 

§  198.  Enforcement  of  the  lien —  The  lien  is  usually 
enforced  by  the  cor]^x)ration  refusing  to  register  a  trans- 
fer of  the  shares  upon  its  books  until  the  debt  is  paid. 
The  liability  is  one  fixed  by  contract  between  the  parties, 
and  generally  no  action  is  necessary  on  the  part  of  the 
coi'poration  to  enforce  the  lien.^''  The  stock  may  be 
regarded  in  the  light  of  a  pledge,  and  the  pledgee  has 
the  right  to  sell  the  same  and  apply  the  proceeds  to  the 
debt,  the  owner  thereof  being  entitled  to  any  sui-plus 
which  may  remain  after  the  debt  is  extinguished.^* 
The  corporation  may  make  application  to  a  court  of 
equity  and  have  the  shares  sold.^^ 

§  199.  Right  of  the  corporation  to  refuse  to  register 
transfers. —  From  preceding  statements  it  will  be  seen 
that  this  right  will  depend  upon  the  interpretation  of 
the  language  of  the  statute,  charter,  or  by-law  which 
contains  the  provision  giving  to  the  corporation  this 
right  of  lien.  If  the  provision  include  all  debts  of 
wliatsoever  kind,  whether  present  or  future,  the  right 
to  refuse  exists,^*^  and  if  the  transferee  wishes  the 
stock  transferred  in  his  own  name  he  must  first  dis- 
charo:e  the  indebtedness  of  the  transferrer;^^  and  this 


32.  Cecil,  etc..  Bank  v.  Watsontown  Bank,  105  U.  S.  217; 
Moore  v.  Bank  of  Commerce,  52  Mo.  377.  For  instances  which  do 
not  amount  to  waiver,  see  Reese  v.  Bank  of  Commerce,  14  INId. 
271;  First  Nat.  Bank  v.  Hartford,  etc.,  Ins.  Co.,  45  Conn.  22; 
Citizens,  etc.,  Bank  v.  Kalamazoo,  etc..  Bank.  69  N.  \V.  0(5.3 ; 
Bishop  V.  Globe  Co.,  135  Mass.  132;  Jennings  v.  Bank  of  Cali- 
fornia, 79  Cal.  323. 

33.  Sewall  v.  Lancaster  Bank,  17  S.  &  R.  285;  Elliott  v.  Sib- 
ley, 13  So.  500. 

34.  Morris  v.  Cheney,  51  111.  451;  Colcr  v.  Grainger,  74  Fed. 
IG ;    Do\\Tiie  v.   Hoover,    12   Wis.    174. 

35.  Brent  v.  Bank  of  Washington.  10  Pet.   (35  U.  S.)    596. 

36.  Pierson  v.  Bank  of  Washington,  3  Cranch  (U.  S.  C),  363; 
First  Nat.  Bank  v.  Hartford,  etc..  Ins.  Co.,  45  Conn.  22. 

37.  Mt.  Holly  Paper  Co.'s  Appeal,  99  Pa.  St.  514. 


188     SUMMARY    OF   LAW   OF    PRIVATE    CORPORATIONS. 

is  true  even  in  a  sale  under  execution.^^  It  is  also 
evident  that  the  lien  existed  at  the  date  of  transfer, 
for  no  by-law  passed  after  a  transfer  had  been  made 
would  be  operative. 

As  between  transferrer  and  transferee,  the  property 
passes  to  the  transferee  and  is  held  by  the  purchaser 
subject  to  the  lien.^^  So  an  assignee  in  bankruptcy 
acquires  only  the  rights  which  the  bankrupt  had  prior 
to  the  adjudication  of  insolvency,  and  if  stock  of 
the  bankrupt  was  subject  to  a  lien,  he  acquires  the  in- 
solvent's interest  subject  to  the  same  lien.^^ 

(b)  Gift  of  Stock. 

§  200.  Gifts  of  stock  in  a  corporation  are  as  valid 
as  the  gift  of  any  other  property.^^  For  the  sake  of 
clearness  they  may  be  divided  into  gifts  infer  vivos 
and  gifts  causa  mortis. 

§  201.  Gifts  inter  vivos. —  "Delivery  is  essential  to 
constitute  a  valid  gift.  The  deliverv'^  must  be  such  as 
to  vest  the  donee  with  the  control  and  dominion  over 
the  property,  and  to  absolutely  divest  the  donor  of 
his  dominion  and  control,  and  the  delivery  must  be 
made  -with  the  intent  to  vest  the  title  of  the  property 
in  the  donee.  The  intent  is  a  necessary  element  of 
the  transaction.  Delivery,  without  intent  to  vest  the 
title  in  the  donee,  could  pass  no  title  to  him."  ^^ 

A  mere  delivery  of  the  certificate  suffices,  without 
any  transfer,  if  given  as  compensation  for  services 
perfonned,^^  Imt  in  order  to  constitute  it  a  valid  gift 

38.  Mechanics'  Bank  v.  Merchants'  Bank,  45  Md.  513. 

39.  Cecil  Bank  v.  Watsontown  Bank,   105  U.  S.  217;   Johnson 
V.  Laflin,  103  id.  800. 

40.  In  re  Dunkerson.  4  Biss.    (U.  S.  C.)    227. 

41.  Cook    on    Corporations    (4th    ed.),    408;    Thomas,    etc.    v. 
Lewis,  89  Va.  1. 

42.  Jackson  v.  Twenty-third  St.  Ry.  Co.,  88  N.  Y.  520.     See 
also  Williams  v.  Guile,  117  id.  343. 

43.  Reed  v.  Copeland,  50  Conn.  472. 


GIFTS    OF    STOCK.  189 

the  certificate  must  be  indorsed  bj  the  donor.'*^  But 
in  some  jurisdictions  this  would  not  make  a  valid  gift, 
as  the  stock  must  be  transferred  on  the  books  of  the 
corporation.^'^ 

A  gift  of  dividends  forever  is  a  gift  of  stock,  and 
so  too  where  one  executes  a  declaration  of  trust  in  cer- 
tain stock  and  names  his  beneficiaries,  making  himself 
trustee,  but  without  securing  a  transfer,  it  was  held  a 
valid  gift.^° 

If  the  gift  be  fully  executed,  i.  e.,  properly  indorsed 
and  transferred  on  the  books  of  the  corporation,  it 
cannot  be  revoked  by  the  donor  ;^^  and  this  is  true 
even  though  the  donee  be  unaware  of  the  gift.^® 

§  202.  Gifts  causa  mortis. —  Mere  delivery  of  the  cer- 
tificate of  shares  with  intention  to  donate,  without  any 
indorsement  on  the  back,  will  constitute  a  valid  gift 
causa  mortis ;^^  so  too  the  delivery  of  the  keys  of  the 
depository  of  the  stock  is  sufficient,^^  or  the  delivery 
of  the  depository  itself.^^ 

TRAIfSFER. 

§  203.  In  general. — "  A  share  in  a  corporation 
which  has  for  its  object  a  division  of  profits  among 
its  stockholders,  has  been  defined  '  a  right  to  partake, 
according  to  the  amount  of  the  party's  subscription, 
of  the  suii^lus  profits  from  the   use   and  disposal   of 

44.  Matthews  v.  Hoagland,  48  N.  J.  Eq.  455. 

45.  Bennington  v.  Gittings,  2  Gill  &  J.  (Md.)  208;  Nauney  v. 
Morgan,  L.  R..  35  Ch.  Div.  598.  Contra,  Gilkerson  v.  Third  Ave. 
Rv.  Co.,  47  App.  Div.   (N.  Y.)   472. 

'46.  Locke  v.  Farmers'  Loan  &  Tr.  Co.,  140  X.  Y.  1.35.     See  also 
Dickerson's  Appeal,   115   Pa.   St.   198. 

47.  Walker  v.  Joseph,  etc.,  Co.,  47  N.  J.  Eq.  342. 

48.  Francis  v.  New  York,  etc.,  Ry.  Co..   108  N.  Y.  93. 

49.  Walsh  v.  Sexton,  55  Barb.  251;  Roberts'  Appeal,  85  Pa. 
St.  84. 

50.  Tliomas'  Adnir.  v.  Lewis,  89  Va.  1. 

51.  Com.  V.  Crompton,  137  Pa.  St.  138.  See  also  Grjmes  v. 
Hone,  49  N.  Y.  17. 


190      SUMMAKY    OF   LAW    OF    PRIVATE    CORPOKATIOXS. 

the  capital  stock  of  the  company  to  the  purposes  for 
which  the  company  is  constituted.'  iVngell  6z  Ames 
on  Coi-jDorations,  §  557. 

"It  cannot  be  disputed  that  this  right  is  property  of 
a  definite  and  important  character,  with  many  of  the 
qualities  of  visible,  tangible,  personal  property,  and 
having  a  value,  and  as  capable  of  appreciation  as  ves- 
sels or  merchandise,  or  other  personal  chattels."  Shaw, 
C.  J.,  in  Fisher  v.  Essex  Bank,  5  Gray,  377.  From 
this  is  follows,  by  inevitable  inference,  that  it  may  be 
the  subject  of  sale  as  much  as  any  other  species  of 
property,  real  or  personal,  so  that,  as  between  vendor 
and  vendee,  the  title  may  pass  by  their  own  act,  and 
be  thereby  vested  absolutely  in  the  vendee. 

"  It  seems  too  clear  for  argument,  that  the  OA\Tier- 
ship  of  the  shares  passes  from  the  seller  to  the  buyer 
by  force  of  the  contract  of  sale,  and  not  by  operation 
of  law;  and  if  that  be  so,  the  buyer's  title,  so  far  as 
the  seller  is  concerned,  attaches  the  moment  this  con- 
tract is  fully  consummated  between  them. 

"  This  kind  of  property,  being  an  intangible  right, 
somewhat  akin  to  the  right  to  receive  money  due  upon 
a  bond  or  other  chose  in  action,  is  incapable  of  actual 
manual  delivery.  All  the  seller  can  do,  that  corre- 
sponds at  all  to  the  delivery  of  personal  chattels  in 
other  cases  of  sale,  is,  to  hand  over  to  the  buyer  his 
certificate,  with  a  sufiicient  assignment  by  deed  or 
otherwise  to  entitle  him  to  a  transfer  of  the  shares 
on  the  books  of  the  company.  When  the  seller  has 
done  this,  his  power  and  duty  in  the  matter  are  ended, 
and  it  is  at  the  option  of  the  purchaser  whether  the 
transfer  shall  be  recorded  or  not. 

"  If  the  purchaser  omits  to  have  the  record  made, 
he  can  claim  no  rights  as  a  member  of  the  corporation; 
and  he  also  incurs  the  further  risk  of  having  his  title 


il 


TRANSFEES   OF   STOCK.  191 

defeated  by  a  subsequent  attackment  or  sale  to  a  hona 
fide  purchaser."  ^" 

In  the  absence  of  a  statutory  or  charter  provision, 
or  of  a  bj-law  passed  in  pursuance  of  legislative  au- 
thority prescribing  an  exclusive  manner  in  which  the 
stock  of  a  corjooration  shall  be  transferred,  the  o^vner 
may  transfer  the  same  to  a  purchaser,  pledgee,  or 
donee  by  the  delivery  of  the  stock  certificate  with  a 
written  assignment  thereof.  Such  a  transfer  is  suffi- 
cient at  common  law  to  convey  the  legal  as  well  as 
the  equitable  title  as  against  all  persons,  including  the 
corporation.  The  assigTiment  may  be  in  blank  and 
pass  from  one  to  another  by  the  delivery  of  the  cer- 
tificate without  further  indorsement,  the  person  hold- 
ing the  certificate  having  the  right  to  fill  up  the  blank 
at  any  time.^^ 

§  201.  Contract  to  transfer  must  be  in  writing. — 
"  There  is  nothing  in  the  nature  of  stocks,  or  shares 
in  companies,  which  in  reason  or  sound  policy  should 
exempt  contracts  in  respect  to  them  from  those  rea- 
sonable restrictions,  designed  by  the  statute  to  prevent 
frauds  in  the  sale  of  other  commodities.  On  the  con- 
trary, these  companies  have  become  so  numerous,  so 
large  an  amount  of  the  property  is  invested  in  them, 
and  as  the  ordinary  indicia  of  property,  arising  from 
delivery  and  possession,  cannot  take  place,  there  seems 
to  be  peculiar  reason  for  extending  the  provisions  of 
this  statute  to  them.  As  they  may  properly  be  in- 
cluded under  the  term  goods,  as  they  are  within  the 
reason  and  policy  of  the  act,  the  court  are  of  opinion, 
that  a  contract  for  the  sale  of  shares,  in  the  absence 
of  the  other  requisites,  must  be  proved  by  some  note 
or  memorandum  in  writing."  ^* 

52.  Scripture  v.  Francestown  Soapstone  Co..  50  N".  H.  571. 

53.  Boston,  etc..  Assn.  v.  Corv,  120  Mass.  435. 

54.  Tisdale  v.  Harris,  20  Pick.    (Mass.)    9. 


192      SUMMARY    OF    LAW   OF    PRIVATE   CORPORATIOXS. 

§  205.  Restrictions  upon. —  Statutory  or  charter  pro- 
visions may  be  imposed  affecting  the  transfer  of  shares. 
As  has  been  noted,  such  provisions  are  binding  upon 
purchasers  who  are  chargeable  with  notice  thereof. 
Few  statutory  or  charter  provisions  restrict  the  trans- 
fer 'altogether,  but  the  majority  of  the  States  have 
j)rovisions  in  their  general  laws  which  regulate  and 
require  them  to  be  made  in  a  certain  way.^"* 

The  power  of  a  corporation  to  enact  by-laws  regu- 
lating the  transfer  of  shares,  which  by-laws  are  deemed 
necessary  to  protect  the  corporation  and  the  share- 
holder as  well,  is  not  doubted. 

"  Stock  in  an  incorporated  company  is  personal  prop- 
erty. Transfers  of  personal  property,  to  be  valid  as 
against  attaching  creditors,  sli^uld  be  attended  by  a 
visible  change  of  possession,  or  else  evidence  of  the 
transfer  should  be  spread  upon  a  public  record.  We 
have  an  express  provision  of  statute  for  property  where 
a  visible  change  of  possession  can  be  made.  In  the 
case  of  stock  in  an  incorjiorated  company,  no  visible 
change  of  possession  can  be  made.  Stock  is  a  share 
in  the  interests  and  rights  of  the  corporation.  Cer- 
tificates are  mere  evidence.  They  may  never  be  is- 
sued. It  is  not  essential  that  they  should  be.  "When 
issued,  they  are  merely  for  convenience.  The  object 
of  the  imperative  provision  that  transfers  of  stock  shall 
be  recorded  unquestionably  is  that  the  ownership  may 
be  made  apparent."  ^^ 

But  provisions  of  these  kind  do  not  warrant  the  cor- 
poration or  its  directors  in  going  beyond  reasonable 
precautions  in  refusing  transfers.  The  object  is  to 
protect  the  corporation,  and  the  method  of  doing  it 
must  be  reasonable.  "Although  there  is  express  power 
to  tlie  directors  to  refuse  to  assent  to  or  register  a 

55.  Fisher  v.  Esspx  Bank.  5  Gray   (Mass.).  373. 

56.  Ft.  Madison  Lumber  Co.  v.  Batavian  Bank,  71  Iowa,  270. 


TJRANSFEKS    OF   STOCK.  193 

transfer,  this  power  must  be  exercised  in  a  reasonable 
manner  and  hoiia  fide,  and  they  must  have  some  valid 
and  lawful  reason  for  refusing  to  register."  "  The 
power  can  only  go  to  the  extent  of  prescribing  condi- 
tions essential  to  the  protection  of  the  association 
against  fraudulent  transfers,  or  such  as  may  be  de- 
signed to  evade  the  just  responsibility  of  the  stock- 
holder. It  is  to  be  exercised  reasonably.  Under  the 
pretense  of  prescribing  the  manner  of  the  transfer,  the 
association  cannot  clog  the  manner  of  the  transfer  or 
make  it  dependent  upon  the  consent  of  the  directors 
or  other  shareholders."  ^^ 

An  agreement  between  shareholders  of  a  corpora- 
tion not  to  sell  or  transfer  their  shares  without  the  con- 
sent of  all  the  parties  thereto  is  void  as  in  restraint 
of  trade,  if  there  is  no  other  consideration  than  the 
inutual  'promises  of  the  stockholders.''^  On  the  other 
hand,  it  seems  that  the  principle  has  no  operation  where 
a  valid  consideration  is  the  basis  of  such  an  agreement.^^ 

An  agreement  between  the  corj)oration,  with  power 
to  purchase  its  own  shares,  and  a  shareholder,  giving 
the  former  the  right  or  option  to  purchase  the  shares 
before  they  shall  be  offered  to  others  is  valid.^°  Sub- 
stitute another  or  a  group  of  other  shareholders,  whose 
power  to  purchase  is  unquestioned,  for  the  corporation, 
and  upon  what  principle  can  an  adverse  decision  be 
based? 

§  206.  Negotiability  of  certificates  of  shares. —  "  Tbe 
rule  is  well  settled,  that  a  hona  fide  purchaser  of  a  ne- 
gotiable bill,  bond,  or  note,  payable  to  bearer,  although 
be  buys  from  a  thief,  acquires  a  good  title,  if  he  pays 

57.  Johnston  v.  Laflin,  5  Dill.  65 ;  s.  c,  103  U.  S.  800. 

58.  Williams  v.  Montgomery,  68  Hun  (N.  Y.),  416;  s.  c,  148 
N.  Y.  519.     But  see  2  Thompson,   §  2311. 

59.  Vansands  v.  ]\Iiddlesex  Co.  Bank.  26  Conn.  144;  Jenninj^s 
V.  Bank  of  Colorado.  79  Cal.  323:  Stafford  v.  Produce  Exch. 
Bank,  61  Ohio  St.  160. 

60.  New  England  Trust  Co.  v.  Abbott,   162  Mass.   148. 

13 


194      SUMMARY    OF    LAW    OF    PKIVATE    COUrOKATIONS. 

value  for  it  without  notice  of  the  infinnity  of  his  ven- 
dor's title.  The  authorities  are  clear  in  support  of  the 
view,  that  a  certificate  of  corporate  shares  of  stock,  in 
the  ordinary  form,  is  not  negotiahle  paper,  and  that  a 
purchaser  of  such  certificate,  although  indorsed  in  blank 
by  the  owner,  where  no  question  arises  under  the  regis- 
tration laws,  obtains  no  better  title  to  the  stock  than  his 
vendor  had,  in  the  absence  of  all  negligence  on  the  part 
of  the  o\\Tier,  or  his  authority  to  make  the  sale.  This 
question  arose,  and  was  decided  by  the  jSTew  York  Court 
of  Appeals.  It  was  there  held  that  such  a  certificate 
does  not  partake  of  the  character  of  a  negotiable  in- 
strument, and  that  a  bona  fide  assignee,  with  full  power 
to  transfer  the  stock,  takes  the  certificate  subject  to 
the  equities  which  existed  against  his  assignor.  '  Such 
certificates,'  said  Comstock,  J.,  '  contain  no  words  of 
negotiability.  They  declare  simply  that  the  person 
named  is  entitled  to  certain  shares  of  stock.  They 
do  not,  like  negotiable  instruments,  run  to  the  bearer, 
or  order  of  the  party  to  whom  they  are  given.'  They 
were  said  to  be,  in  some  respects,  like  a  bill  of  lading, 
or  warehouse  receipt,  being  '  the  representative  of 
property  existing  under  certain  conditions,  and  the 
documentary  evidence  of  title  thereto.'  The  most 
that  can  be  said  is,  that  all  such  instruments  possess 
a  sort  of  quasi-negotiability,  dependent  upon  the  cus- 
tom of  merchants  and  the  convenience  of  trade.  They 
are  not,  in  the  matter  of  transferability,  protected 
strictly  as  negotiable  paper."  ^^ 

§  207.  Unauthorized  or  fraudulent  transfers. — "  '  There 
is  a  class  of  cases,  *  *  *  where  the  holder  of 
such  a  certificate  of  stock,  indorsed  in  blank,  is  clothed 
with  power  as  agent  or  tinistee,  to  deal  with  such  stock 
to  a  limited  extent,  and  transfers  it  by  exceeding  his 
powers,  or  in  breach  of  his  tnist.     In  such  cases,  it 

61.  East  Birmingham  Land  Co.  v.  Dennis,  85  Ala.   565. 


TRANSFERS   OF   STOCK.  195 

has  often  been  held  that  the  true  owner,  having  con- 
ferred on  the  holder,  by  contract,  all  the  external  in- 
dicia of  title,  and  an  apparently  unlimited  power  of 
disposition  over  the  stock,  *  is  estopped  to  assert  his  title 
as  against  a  third  person,  who,  acting  in  good  faith, 
acquires  it  for  value  from  the  apparent  owner.'  These 
cases  rest  on  the  principle,  that  it  is  more  just  and 
reasonable,  where  one  of  two  innocent  parties  must 
suffer  loss,  that  he  should  be  the  loser  who  has  put 
trust  and  confidence  in  the  deceiver,  than  a  stranger 
who  has  been  negligent  in  trusting  no  one.'  Allen  v. 
Maury  &  Co.,  66  Ala.  10."  ^^ 

§  208. The  effect  of  a  transfer  of  shares. —  "'A  trans- 
fer of  shares  in  a  coi^Doration  means  the  substitution 
of  a  new  shareholder  in  place  of  an  outgoing  share- 
holder in  the  company,  and  an  assumption  by  the 
former  of  all  the  rights  and  obligations  which  attached 
to  the  transferring  shareholder  by  reason  of  his  owner- 
ship of  the  shares.  This  involves  a  novation  of  the 
contract  of  membership.  The  transferrer  ceases  to 
be  a  shareholder  in  the  company.  Unless  the  contrary 
be  expressly  provided  in  the  company's  charter,  he  is 
thus  discharged  from  all  further  liability  to  contribute 
capital,^^  and  loses  all  right  to  share  in  the  company's 
profits  and  to  participate  in  the  management  of  its 
affairs.^* 

"  '  The  transferee,  on  the  other  hand,  becomes  a  share- 
holder in  place  of  the  retiring  member.  He  impliedly 
assumes  all  the  obligations  which  rested  upon  the 
former  holder  as  member  of  the  company,  and  is  liable 


62.  Idem;  McNeil  v.  Tenth  Nat.  Bank,  40  X.  Y.  325;  X.  Y., 
etc..  Ry.  Co.  v.   Schuyler,  34  id.   30. 

63.  Isham  v.  Buckingham,  49  N.  Y.  21G;  Johnson  v.  Laflin,  5 
Dill.  65;  s.  c.  103  U.  S.  800;  Allen  v.  Montgomery,  etc.,  Ry.  Co., 
11  Ala.  451;  Harrison's  Case,  L.  R..  6  Ch.  286,  etc. 

64.  Boardman  v.  Lake  Shore,  etc.,  Ry.  Co.,  84  N.  Y.  157;  Bris- 
bane V.  D.,  L.  &  W.  Ry.  Co.,  94  id.  204. 


196      SUMMARY    OF   LAW    OF    PRIVATE   CORPORATIONS. 

for  calls  to  the  same  extent  as  the  former  holder  before 
the  transfer  was  made.*^^ 

"  ^  He  also  becomes  entitled  to  all  the  privileges  of 
membership  and  may  claim  all  dividends  declared  while 
he  is  a  shareholder  in  the  company.'  ^^  (1  Morawetz, 
§  159.) 

§  209.  Unregistered  transfers  as  between  the  parties 
thereto. —  The  weight  of  authority  seems  to  be  in  favor 
of  the  proposition  that  where  a  provision  exists  in 
statute  or  charter  that  the  shares  shall  be  transferable 
only  on  the  books  of  the  corporation,  the  transferee 
gets  only  an  equitable  right  and  not  the  legal  title, 
holding  that  registration  is  necessary  to  complete  or 
pass  the  legal  title.  This  equitable  right  will  prevail 
as  against  all  persons  who  seek  to  enforce  a  right  ac- 
quired with  notice  of  the  transfer,  but  it  will  not  pro- 
tect the  transferee  where  notice  cannot  be  imputed  to 
an  innocent  purchaser/^' 

There  are  a  number  of  excellent  jurisdictions  which 
claim  that,  inasmuch  as  the  provision  is  intended  merely 
as  protection  for  the  corporation,  as  between  the 
parties  themselves  both  the  legal  title  and  equitable 
rights  pass,  but  consent  to  the  practically  unanimous 
authority  that  as  between  the  corporation  and  hona 
fide  purchasers,  the  equitable  right  only  passes.^^ 

§  210.  As  against  the  corporation. —  Where  a  valid 
provision  exists  in  statute,  charter,  or  by-law  requir- 
ing the  transfer  on  the  books  of  the  company,  the  trans- 

65.  Webster  v.  Upton,  91  U.  S.  65;  Pullman  v.  Upton,  96  id. 
328. 

66.  March  v.  Eastern  Rv.  Co.,  4.3  N.  H.  515;  .Jones  v.  Terre 
Haute,  etc.,  Ry.  Co.,  57  N.  Y.  196;  Gifford  v.  Thompson,  115 
Mass.  478. 

67.  Fisher  v.  Essex  Bank,  5  Gray,  373;  Scripture  v.  Francea- 
town  Soapstone  Co.,  50  N.  H.  571 :  .Johnson  v.  Laflin,  103  U.  S. 
800:  Lippitt  v.  American  Wood,  etc.,  Co.,  15  R.  I.  141. 

68.  McNeil  v.  Tenth,  etc,  Bank,  46  N.  Y.  325;  Broadway 
Bank  v.  McElrath,  13  N.  J.  Eq.  24;  McLean  v.  Charles  Wright, 
etc.,  Co.,  96  Mich.  479. 


TEANSFEES   OF   STOCK.  197 

fer  must  be  made,  or  notice,  which  will  amount  to  a 
waiver  or  estoppel,  given  before  the  transferrer  can 
be  relieved  from  liability  to  the  coii^oration.^^  The 
reason  for  the  provision  is  the  protection  of  the  cor- 
poration, to  enable  it  to  know  just  who  its  shareholders 
are.  ''  The  general  rule  is  that  a  corporation  looks 
only  to  its  books  for  the  purpose  of  ascertaining  who 
are  its  shareholders  and  entitled  to  the  rights  as  such."  "" 

§  211.  As  against  creditors. — The  provisions  affect- 
ing registration  are  regarded  as  not  only  for  the  pro- 
tection of  the  corporation,  but  also  for  the  protection 
of  persons  dealing  with  the  corporation,  so  that  they 
may  know  just  who  the  stockholders  are.  Under  this, 
it  is  a  general  rule  that  a  transfer  which  is  not  regis- 
tered does  not  relieve  the  transferrer  from  liability 
to  the  creditors,  which  may  be  imposed  by  the  statutes.'^ 

§  212.  Shareholder's  right  to  a  transfer — "'The  pur- 
chaser of  a  stock  certificate  regular  on  its  face,  who  is 
willing  to  comply  with  the  corporate  regulations  re- 
specting the  transfer  of  shares,  may  maintain  an  action 
in  equity  against  the  corporation  to  compel  it  to  trans- 
fer the  shares  to  him.'^  Or,  on  the  refusal  of  the  cor- 
poration to  make  the  transfer,  he  may  sue  it  for 
damages,^^  and  as  damages  recover  the  market  value 
of  the  shares  at  the  time  of  its  refusal.*^^  If,  however, 
the  relief  demanded  is  in  the  alternative  for  specific 
performance  or  for  damages,  a  judgment  for  damages 

69.  Union  Bank.  etc.  v.  Laird,  2  Wheat.  390;  Brisbane  v.  D., 
L.  &  W.  Rv.  Co..  94  N.  Y.  204. 

70.  2  Thompson.  §  2387. 

71.  Eichmond  v.  Irons.  121  U.  S.  27:  Shellington  v.  Howland, 
53  N.  Y.  371  :  Harpold  v.  Stobart,  40  Ohio  St.  397. 

72.  Driscoll  v.  West  Bradley,  etc..  Co..  59  N.  Y.  9G ;  Hill  v. 
Eockingham  Bank,  44  N.  H.  567;  Siblev  v.  Quinsigamond  Bank, 
133  Mass.  515. 

73.  Kortright  v.  BufTalo.  etc..  Bank.  20  Wend.  ( N.  Y.)  91; 
German  Union,  etc.  v.  Sendmever.  50  Pa.  St.  07;  Galbraitli  v. 
Building  Assn..  43  N.  J.  L.  389:   Case  v.  Bank.  100  U.  S.  440. 

74.  Galegher  v.  Jones.  129  U.  8.  193;  Wright  v.  Bank  of 
Metropolis.  110  N.  Y.  237. 


198      SUMMARY    OF   LAW   OF    PRIVATE    CORPORATIONS. 

is  improper  unless  it  appear  that  the  corporation  is 
unable  to  deliver  the  shares  or  similar  ones.'^  And 
when  a  person  whom  a  coi*poration  refuses  to  recognize 
as  a  shareholder  elects  to  treat  such  refusal  as  a  con- 
version of  the  shares  and  sues  for  damages  in  trover, 
he  can  maintain  no  action  for  dividends  declared  after 
the  commencement  of  his  suit  J^  The  great  preponder- 
ance of  authority  is  that  mandamus  will  not  lie  to  com- 
pel a  corporation  to  transfer  shares."  "^^ 

7.5.  otter  v.  Brevoort  Petroleum  Co.,  50  Barb.    (X.  Y.)    247. 

76.  Hughes  v.  Vermont  Copper,  etc.,  Co.,  72  N.  Y.  207. 

77.  Tavlor  (.ith  ed.).  S  599;  Kino-  v.  Bank  of  England.  2  Doug. 
524;  Ex  parte  Firemen's  Ins.  Co.,  6  Hill  (N.  Y.),  24.3;  Galbraith 
V.  Building  Assn.,  43  N.  J.  L.  389;  Townes  v.  Nichols,  73  Me.  515. 


CHAPTER  X. 

Ceeditoes'  Rights  and  Remedies. 

(a)  The  Ckeditoe  and  the  Corporation. 

(b)  The  Creditor  and  the    Shareholder. 

(A)  The  Creditor  and  the  Corporation. 

§  213.  In  general. —  The  relations  between  a  creditor 
and  the  corporation  are  those  which  are  founded  on 
contract,  and  come  within  the  terms  of  debtor  arid  cred- 
itor. "  That  the  relation  of  debtor  and  creditor  is 
not  a  confidential  one  there  can,  of  course,  be  no 
doubt.  It  is  absurd  to  say  that  the  creation  of  that 
relation  involves  aught  of  accident,  mistake,  or  ig- 
norance. That  a  debtor  has  property  of  his  creditor 
which  in  equity  and  good  conscience  belongs  to  the 
creditor,  because  the  debt  contracted  in  its  sale  has 
not  been  paid,  there  is  no  warrant  for  saying.  Equally^ 
unwarranted  is  the  idea  that  in  equity  all  the  property 
of  a  debtor  who  has  become  insolvent  belongs  to  the 
creditor,  and  is  held  by  the  debtor  in  trust  for  him. 
And  this  idea  of  ownership  in  the  cestui  que  trust  un- 
derlies the  whole  doctrine  of  trusts  of  every  descrip- 
tion. In  all  trusts  the  legal  title  is  in  one,  the  equitable 
ownership  in  another.  A  mere  debt  against  one  who 
has  property,  whether  solvent  or  insolvent,  is  not  o^\Tier- 
ship,  nor  is  a  right  to  charge  a  fund,  or  a  lien  upon  it, 
the  beneficial  ownership  of  it."  ^  'Nov  is  this  relation- 
ship created  by  contract  a  fiduciary  one  whereby  the 
creditor  can  hold  either  the  corporation  or  its  mana- 
gers to  account  because  of  any  duty  owed  by  them  to 

1.  O'Bear,  etc.,  Co.  v.  Volfer.  lOfi  Ala.  205. 
[199] 


200      SUMMARY    OF    LAW    OF    J'lUVATE    COKrOKATIONS. 

the  creditor.  The  duty,  if  any  exists  at  all,  is  simply 
the  duty  which  an  individual  owes  to  his  creditor  and 
no  more,  and  generally  speaking  the  creditor  of  a  cor- 
poration has  the  same  rights  against  the  corjioration 
that  an  individual  creditor  has  against  an  individual 
debtor  and  no  more. 

§  214.  Creditors'  right  to  interfere  with  the  manage- 
ment.— .  The  creditors  of  a  corporation  have  no  right, 
either  at  law  or  equity,  merely  because  they  are  cred- 
itors, to  interfere  in  the  management,  or  to  come  into  a 
court  of  equity  to  restrain  it  from  making  contracts  or 
disposing  of  property,  unless  there  is  fraud  or  breach 
of  trust  to  give  a  court  of  equity  jurisdiction."  The 
property  of  a  corporation  belongs  to  it  and  they  may- 
dispose  of  it  to  the  same  extent  as  a  natural  person.  If 
it  makes  conveyances  or  transfers  property  on  which 
creditors  have  a  lien,  or  if  it  makes  them  not  in  good 
faith,  but  with  intent  to  hinder  or  delay  its  creditors, 
they  may  come  into  a  court  of  equity,  after  obtaining 
judgment  and  obtain  relief.  Or,  if  the  remedy  is  given 
by  statute  they  may  proceed  by  attachment,  but  in  the 
absence  of  fraud  or  breach  of  trust,  equity  will  not 
afford  them  relief,  and  this  even  if  ultra  vires  are 
alleged  or  that  the  corporation  is  insolvent.^ 

"  A  corporation  is  a  distinct  entity.  Its  affairs  are 
necessarily  managed  by  officers  and  agents,  it  is  true; 
but  in  law  it  is  as  distinct  a  being  as  an  individual  is, 
and  is  entitled  to  hold  property  (if  not  contrary  to  its 
charter)  as  absolutely  as  an  individual  can  hold  it.  Its 
estate  is  the  same,  its  interest  is  the  same,  its  possession 
is  the  same.  Its  stockholders  may  call  the  officers  to 
account,  and  may  prevent  any  malversation  of  funds 
or  fraudulent  disposal  of  property  on  their  part.     But 

2.  Mills  V.  Northern  Ry.  Co.,  L.  R..  .5  Ch.  App.  621 ;  Pond  v. 
Framingham.  etc..  Rv.  Co.,  130  Mass.  194;  Graham  v.  Railroad 
Co..  102  IT.  S.  148. 

3.  Idem. 


k 


i 


I 


CEEDITOKS'    BIGHTS    A:SJ)    KEMEDIES.  201 

that  is  done  in  the  exercise  of  their  corporate  rights, 
not  adverse  to  the  coi*porate  interests,  but  coincident 
with  them.  When  a  coi-poration  becomes  insolvent  it 
is  so  far  civilly  dead  that  its  property  may  be  admin- 
istered as  a  trust  fund  for  the  benefit  of  its  stockhold- 
ers and  creditors.  A  court  of  equity,  at  the  instance  of 
the  proper  parties,  will  then  make  those  funds  trust 
funds,  which,  in  other  circumstances,  are  as  much  the 
absolute  property  of  the  corporation  as  any  man's  prop- 
erty is  his.  We  see  no  reason  why  the  disposal  by  a 
corporation  of  any  of  its  i>roperty  should  be  questioned 
by  subsequent  creditors  of  the  corporation  any  more 
than  a  like  disposal  by  an  individual  of  his  property 
should  be  so."  ^ 

§  215.  The  "  trust  fund  "  theory. —  It  has  long  been  a 
favorite  theory  with  the  various  United  States  juris- 
dictions that  the  capital  stock  of  a  corporation  is  a 
trust  fund  in  the  hands  of  the  corporation  for  the  pay- 
ment of  its  debts  and  that  the  corporation  stands  in  the 
relation  of  tnistee  to  the  creditors  and  shareholders. 

This  theory  was  first  formulated  by  Justice  Story  in 
Wood  V.  Dummer  ^  (1835),  and  from  that  time  to 
this,  has  obtained  to  a  greater  or  less  extent  in  all  juris- 
dictions. Indeed,  the  Supreme  Court  of  Tennessee  has 
gone  to  the  extent  of  holding  that  the  capital  stock  is 
a  trust  fund  not  only  for  the  creditors  and  the  share- 
holders, but  for  the  State  and  public  generally.^  On 
the  other  hand,  the  United  States  courts  as  well  as 
many  of  the  State  courts  have  qualified  the  theory  to 
a  considerable  extent. 

"  The  case  of  Graham  v.  Railroad  Co.,  102  U.  S.  148, 
was  an  action  by  a  subsequent  creditor  to  subject  certain 
property,  alleged  to  have  been  wrongfully  conveyed  by 
the  corporation  debtor,  to  the  satisfaction  of  his  judg- 

4.  Graham  v.  Eailroad  Co..  102  U.  S.  148. 

5.  .3  Mason   (IT.  S.  C).  ;U)S. 

6.  Shea  v.  Mabry.  1  Lea   (Tcnn.).  .310. 


202      SUMMAEY  OF  LAW   OF   PRIVATE   CORFORATIOXS. 

ment.  And  the  very  proposition  here  presented  was 
then  considered,  and  in  respect  to  it  the  court,  by 
Bradley,  J.,  said  (p.  160):  '  It  is  contended,  however, 
bj]  the  appeUant  that  a  corporation  debtor  does  not 
stand  on  the  same  footing  as  an  individual  debtor;  that 
while  the  latter  has  supreme  dominion  over  his  own 
property,  a  corporation  is  a  mere  trustee,  holding  its 
property  for  the  benefit  of  its  stockholders  and  cred- 
itors, and  if  it  fails  to  pursue  its  rights  against  third 
persons,  whether  arising  out  of  fraud  or  otherwise,  it 
is  a  breach  of  trust,  and  creditors  may  come  into  equity 
to  compel  an  enforcement  of  the  corporate  duty.  This, 
as  we  understand,  is  the  substance  of  the  position 
taken. 

"  We  do  not  concur  in  this  view.  It  is  at  war  with 
the  notions  which  we  derive  from  the  English  law  with 
regard  to  the  nature  of  corporate  bodies.  A  corpora- 
tion is  a  distinct  entity.  Its  affairs  are  necessarily  man- 
aged by  officers  and  agents,  it  is  true;  but  in  law  it  is 
as  distinct  a  being  as  an  individual  is,  and  is  entitled  to 
hold  property  (if  not  contrary  to  its  charter)  as  ab- 
solutely as  an  individual  can  hold  it.  Its  estate  is  the 
same,  its  interest  is  the  same,  its  possession  is  the  same. 
Its  stockholders  may  call  the  officers  to  account,  and 
may  prevent  any  malversation  of  funds  or  fraudulent 
disposal  of  property  on  their  part.  ■  But  that  is  done 
in  the  exercise  of  their  corporate  rights,  not  adverse 
to  the  cori:)orate  interests,  but  coincident  with  them. 

"  When  a  corporation  becomes  insolvent  it  is  so  far 
civilly  dead  that  its  property  may  be  administered  as  a 
trust  for  the  benefit  of  its  stockholders  and  creditors. 
A  court  of  equity,  at  the  instance  of  the  proper  parties, 
will  then  make  those  funds  trust  funds,  which,  in  other 
circumstances,  are  as  much  the  absolute  property  of 
the  corporation  as  any  man's  property  is  his.' 

"  With  reference  to  the  suggestion  in  this  last  para- 


creditors'  rights  and  remedies.  203 

graph,  it  maj  be  observed  that  the  court  does  not  at- 
tempt to  determine  who  are  the  proper  parties  to  main- 
tain a  suit  for  the  administration  of  the  assets  of  an 
insolvent  corporation.  All  that  it  decides  is  that  when 
a  court  of  equity  does  take  into  possession  the  assets 
of  an  insolvent  corporation,  it  will  administer  them  on 
the  theory  that  they  in  equity  belong  to  the  creditors 
and  stockholders  rather  than  to  the  corporation  itself. 
In  other  words  —  and  that  is  the  idea  which  underlies 
all  these  expressions  in  reference  to  '  trust '  in  con- 
nection with  the  property  of  a  corporation  —  the  cor- 
poration is  an  entity,  distinct  from  its  stockholders  as 
from  its  creditors.  Solvent,  it  holds  its  property  as  any 
individual  holds  his,  free  from  the  touch  of  a  creditor 
who  has  acquired  no  lien;  free  also  from  the  touch  of  a 
stockholder  who,  though  equitably  interested  in,  has  no 
legal  right  to  the  property.  Becoming  insolvent,  the 
equitable  interest  of  the  stockholders  in  the  property,  to- 
gether with  their  conditional  liability  to  the  creditors, 
places  the  property  in  a  condition  of  trust,  first  for  the 
creditors  and  then  for  the  stockholders.  AMiatever  of 
trust  there  is,  arises  from  the  peculiar  and  diverse 
equitable  rights  of  the  stockholders  as  against  the  cor- 
poration in  its  property  and  their  conditional  liability  to 
its  creditors.  It  is  rather  a  trust  in  the  administration 
of  the  assets  after  possession  by  a  court  of  equity  than 
a  trust  attaching  to  the  property  as  such  for  the  direct 
benefit  of  either  creditor  or  stockholder."  ^ 

Eef erring  to  "Wabash,  etc.,  Ry.  Co.  v.  Ham,  115 
TJ.  S.  587;  Fogg  v.  Blair,  133  id.  504;  and  Hawkins 
V.  Glenn,  131  id.  319,  the  court  said:  "These  cases 
negative  the  idea  of  any  direct  trust  or  lien  attaching 
to  the  property  of  a  corporation  in  favor  of  its  cred- 
itors, and  at  the  same  time  are  entirely  consistent  with 
those  cases  in  which  the  assets  of  a  corporation  are 

7.  Hollins  V.  Brierfield  Coal  &  Iron  Co.,  150  U.  S.  371. 


204     SUMMARY  OF  LAW  OF  PRIVATE  CORPORATIONS. 

spoken  of  as  a  trust  fund,  using  the  term  in  the  sense 
that  "vve  have  said  it  was  used. 

"  The  same  idea  of  equitable  lien  and  trusts  exist  to 
some  extent  in  the  case  of  partnership  property. 
AVhencvcr,  a  partnership  becoming  insolvent,  a  court 
of  equity  takes  possession  of  its  property,  it  recognizes 
the  fact  that  in  equity  the  partnership  creditors  have 
a  right  to  payment  out  of  those  funds  in  preference  to 
individual  creditors,  as  well  superior  to  any  claims  of 
the  partners  themselves.  And  the  partnership  property 
is  therefore  sometimes  said  not  to  inapply,  to  be  held 
in  trust  for  the  partnership  creditors,  or  that  they  have 
an  equitable  lien  on  such  property.  Yet  all  that  is 
meant  by  such  expressions  is  the  existence  of  an  equita- 
ble right  which  will  be  enforced  whenever  a  court  of 
equity,  at  the  instance  of  a  proper  party  and  in  a  proper 
proceeding,  has  taken  possession  of  the  assets.  It  is 
never  understood  that  there  is  a  specific  lien  or  a  direct 
trust. 

"  A  party  may  deal  with  a  coi*poration  m  respect  to 
its  property  in  the  same  manner  as  with  an  individual 
owner,  and  with  no  greater  danger  of  being  held  to 
have  received  into  his  possession  property  burdened 
with  a  trust  or  lien.  The  officers  of  a  corporation  act 
in  a  fiduciary  capacity  in  respect  to  its  property  in  their 
hands,  and  may  be  called  to  account  for  fraud  or  some- 
times even  mere  mismanagement  in  respect  thereto; 
but  as  between  itself  and  its  creditors,  the  corporation 
is  simply  a  debtor,  and  docs  not  hold  its  property  in 
trust  or  subject  to  a  lien  in  their  favor  in  any  other 
sense  than  does  an  individual  debtor.  This  is  certainly 
the  general  rule,  and  if  there  be  any  exceptions  thereto, 
they  are  not  presented  by  any  facts  in  this  case, 
l^either  the  insolvency  of  the  corporation,  nor  the  ex- 
ecution of  an  illegal  trust  deed,  nor  the  failure  to  collect 
in  full  all  stock  subscriptions,  nor  all  together,  gave  to 


I 


creditors'   rights  and  remedies.  205 

these  simple  contract  creditors  any  lien  upon  the  prop- 
erty of  the  corporation  nor  charged  any  direct  trust 
thereon."  ^ 

It  may  therefore  be  accepted  as  a  general  principle 
that  the  capital  stock  of  a  solvent  corporation  is  not 
a  trust  fund,  any  more  than  the  assets  of  an  individual 
is  a  trust  fund  for  his  creditors.  Relief  will  be  granted 
to  creditors  of  a  corporation  in  quite  the  same  way,  and 
to  quite  the  same  extent  that  it  will  be  granted  to  the 
creditors  of  an  individual.  This  relief  is  threefold: 
(1)  at  common  law,  by  obtaining  a  judgment  and  hav- 
ing the  same  executed;  (2)  at  equity,  in  securing  pos- 
session of  equitable  assets  or  rights  which  cannot  be 
secured  under  process  of  execution;  and,  (3)  where 
statute  will  allow  it,  by  attachment. 

But  it  is  conceded  by  all  courts  that  there  is  a  point 
when  the  capital  stock  and  assets  of  a  corporation  do 
become  a  trust  fund  for  the  benefit  of  creditors  and 
shareholders,  and  that  point,  just  as  in  the  case  of  an 
individual,  is  where  insolvency  is  imminent  or  actual. 
Under  such  circumstances  creditors  may  interfere; 
when  there  is  an  attempt  to  convey  or  transfer  or  other- 
wise dispose  of  the  property,  either  through  fraud  or 
breach  of  trust,  in  such  a  way  as  to  defeat  creditors' 
claims. 

Tlie  property  of  a  coq>oration  "  is  so  far  regarded  as 
in  tlie  nature  of  trust  property  that  it  can  be  recovered 
by  the  company  from  any  person  who  has  obtained  it 
from  the  directors  with  notice  that  they  are  acting  be- 
yond their  powers."  ^  On  the  same  principle,  cor- 
porate funds  may  be  followed  by  creditors  in  the  hands 
of  any  person  to  whom  they  have  been  transferred  with- 

8.  Ibid.  See  also  O'Bear,  etc.,  Co.  v.  Volfer,  106  Ala.  205: 
Worthen  v.  Griffith,  59  Ark.  562;  Marvin  v.  Anderson,  111  Wis. 
387 

9.  Cole  V.  Millerton  Iron  Co.,  13.3  N.  Y.  164. 


20G      SUMMARY   OF  LAW   OF   FKIVATE   COEPOKATIONS. 

out  consideration,  or  who  receives  them  with  knowledge 
of  the  diversion  of  them  from  their  proper  channels.^*^ 

An  attempt  therefore  to  place  assets  beyond  the 
reach  of  creditors,  by  reincorporation  or  reorganization 
and  transferring  the  assets  of  the  old  corporation  to  the 
new  corporation  without  consideration  would  result  in 
equity  following  the  property  of  the  old  company,  and 
subjecting  it  to  the  creditors'  claims.-^^ 

§  21G.  Remedy  at  law. —  The  only  remedy  of  a  cred- 
itor against  the  corporation  at  law  is  sequestration,  or 
to  levy  and  sell  the  property  thereof  under  execution. 
There  is  a  difficulty  here,  however,  in  the  case  of  quasi- 
public  corporations  in  that  public  policy  requires  that 
the  property  essential  to  the  coi-porate  functions  shall 
be  retained  by  the  corporation.  But  the  personal  prop- 
erty of  the  company,  subject  as  it  is  to  the  voluntary 
sale,  mortgage  by  the  company  itself,  is  also  the  subject 
of  levy  and  sale  on  execution,  and  the  same  thing  may 
be  said  of  any  property  Avhich  is  not  in  actual  use,  or 
necessarj^  to  the  proper  performance  of  coi^porate  func- 
tions.^^ If  there  be  no  duty  owing  to  the  public  by  the 
coi-poration,  in  other  words,  if  it  be  a  strictly  private 
company,  its  property,  both  real  and  personal,  and 
usually  the  franchise  and  rights  are  subject  to  the  legal 
right  of  sequestration. 

§  217.  Remedy  in  equity. —  The  trust  fund  theory  al- 
ready stated  is  the  basis  for  equitable  relief.  Under 
this  theory,  it  is  possible  for  creditors  to  restrain  the 
misapplication  of  funds  by  an  application  for  an  in- 

10.  Ibid.  See  also  Wood  v.  Dummer,  3  Mason,  308;  Railroad 
Co.  V.  Howard,  7  Wall.  (74  U.  S.)  392;  Chicago,  etc.,  Ry.  Co.  v. 
Chicago  Bank.  134  U.  S.  276. 

11.  Montgomery,  etc.,  Ry.  Co.  v.  Branch,  59  Ala.  139;  Mumma 
V.  The  Potomac  Co.,  8  Pet.  (33  U.  S.)  281;  Thornton  v.  Marginal, 
etc..  Rv.  Co..  123  Mass.  32. 

12.  Plymouth,  etc.,  Ry.  Co.  v.  Cohvell,  39  Pa.  St.  337 :  1  Free- 
man on  Executions,  §  179;  Coe  v.  Columbus,  etc.,  Ry.  Co.,  10  Ohio 
St.  372;  Boston,  etc.,  Ry.  Co.  v.  Gilmore,  37  N.  H.  410;  Louis- 
ville, etc.,  Ry.  Co.  v.  Boenv,  117  Ind.  501. 


i 


<l 


creditors'  rights  and  remedies.  207 

junction  and  the  appointment  of  a  receiver.^^  But  this 
relief  does  not  come  as  a  matter  of  course;  the  creditor 
must  show  affirmatively,  that  the  danger  is  actual  and 
imminent,  and  neither  remote  nor  imaginary. 

''  The  property  of  a  coi*poration  is  doubtless  a  trust 
fund  for  the  payment  of  its  debts,  in  the  sense  that 
when  the  coi-poration  is  lawfully  dissolved,  and  all  its 
business  wound  up,  or  when  it  is  insolvent,  all  its  cred- 
itors are  entitled,  in  equity,  to  have  their  debts  paid 
out  of  the  corporate  property  before  any  distribution 
thereof  among  the  stockholders.  It  is  also  true,  in  the 
case  of  a  corporation,  as  in  that  of  a  natural  person, 
that  any  conveyance  of  property  of  the  debtor,  without 
authority  of  law,  and  in  fraud  of  existing  creditors,  is 
void  as  against  them."  ^^ 

"  It  is  difficult  for  me  to  conceive,  where  no  restraint 
is  interposed,  in  a  charter  of  incorporation,  on  what 
ground,  the  general  authority  delegated  is  subjected  to 
exceptions,  or  fettered  by  restrictions,  from  which  an 
individual  and  a  mercantile  company  are  free.  And 
this  difficulty  is  much  increased,  as  no  case  intimating 
this  diversity  between  corporations  and  individuals  has 
been  cited,  nor  can  be  found,  by  my  utmost  researches. 
Where  no  legal  lien  has  been  obtained,  it  is  a  reasonable 
supposition  that  the  relation  of  creditor  and  debtor 
must,  in  all  cases,  infer  the  same  consequences:  and 
that  where  the  same  mischief  exists,  there  is  the  same 
law.  The  cases  of  an  individual  and  of  a  corporation,  in 
the  matter  under  discussion,  it  appears  to  me,  are  not 
merely  analogous,  but  identical;  and  I  discern  no  reason 
for  the  slightest  difference  between  them."  ^^ 

Hence  to  secure  the  aid  of  equity,  the  creditor  must 

13.  Conro  v.  Gray.  4  How.  Pr.  (N.  Y.)  165;  Kearns  v.  Leaf, 
1  Hem.  &  M.  681;  Foster  v.  Borax  Co.,  80  L.  T.  (K  S.)  461, 
Lothrop  V.  Stedman,  42  Conn.  583. 

14.  Wabash,  etc.,  Rv.  Co.  v.  Ham.  114  U.  S.  587. 

15.  Catlin  v.  Eagle  "Bank.  6  Conn.  233. 


208      SUM^iLAKY   OF   LAW    OF   riilVATE   COKPOKATIOiSS. 

first  exhaust  all  legal  remedies,  i.  e.,  secure  a  judgment 
and  have  it  properly  executed  and  returned  unsatisfied. 
As  stated  in  Hollins  v.  Brierfield,  etc.  Co:^"  "The 
plaintifts  were  simple  contract  creditors  of  the  com- 
pany. Their  claims  had  not  been  reduced  to  judgment, 
and  they  had  no  express  lien  by  mortgage,  trust  deed, 
or  otherwise.  It  is  the  settled  law  of  this  court  that  such 
creditors  cannot  come  into  a  court  of  equity  to  obtain 
the  seizure  of  the  property  of  their  debtor,  and  its  ap- 
plication to  the  satisfaction  of  their  claims,  and  this  not- 
withstanding a  statute  of  the  State  may  authorize  such 
a  proceeding  in  the  courts  of  the  State.  The  line  of  de- 
marcation between  equitable  and  legal  remedies  in  the 
Federal  courts  cannot  be  obliterated  by  State  legisla- 
tion." 

Equity,  however,  acts  when  there  is  no  adequate 
remedy  at  law  and  it  may  be  that  immediate  action  of 
a  court  of  equity  is  necessary  in  order  tO'  properly  pro- 
tect the  creditor.  If  this  is  shown  to  the  satisfaction 
of  the  court,  equity  will  aid,  even  in  the  absence  of  ex- 
press liens.'^  So,  too,  it  may  be  by  reason  of  dis- 
solution the  creditor  has  no  legal  remedies  •,^^  or  by 
reason  of  insolvency  such  steps  would  have  been  use- 
less." 

Statute  may  afford  the  creditor  the  right  to  proceed 
in  a  court  of  equity  without  first  having  exhausted  his 
legal  remedies."'^  If  so,  the  creditor  unquestionably 
has  such  a  right  in  the  State  courts,  but  not  in  the 
Federal  courts.^^ 


16.  150  U.  S.  371. 

17.  Chicago,  etc..  Ry.  Co.  v.  Third  Nat.  Bank.  etc..  1.34  U.  S. 
276 ;  Montgomery  v.  Phillips,  5.3  X.  .T.  Eq.  203 ;  Cole  v.  Millerton, 
133  N.  Y.   104. 

18.  Pullman  v.  Stebbins,  51   Fed.  10. 

19.  O'Brien  v.  Stambach,  101  Iowa,  40;  Ferry  v.  Anderson, 
95  U.  S.  628. 

20.  Cohn  V.  Waters,  83  111.  App.  387. 

21.  Hollins  V.  Brierfield,  etc..  Co.,  150  U.  S.  37. 


CEEDITOKS      KIGHTS    A^D    KEilEDIES.  200 

§  218.  Assignment  for  the  benefit  of  creditors. —  This 
question  has  been  the  subject  of  express  statutory  en- 
actment in  several  States,  where  it  is  provided  that  as- 
signments by  insolvent  corporations,  either  actual  or 
in  contemplation,  shall  be  void,  for  reasons  of  public 
policy.  In  the  absence  of  statute,  however,  it  seems 
well  settled  that  the  corporation  may  make  a  voluntary 
assignment  for  the  benefit  of  its  creditors.^^  But  when 
it  comes  to  the  question  of  preferring  creditors,  the 
courts  are  divided,  some  of  them  holding  that  the 
trust  fund  theorj'  that  the  capital  stock  and  assets  form 
a  trust  fund  for  all  the  creditors  who  are  entitled  to 
share  in  them  ratably  will  prevent  preferences;^  while 
others  and  probably  the  weight  of  authority  being  in 
favor  of  the  proposition  that  unless  expressly  prohibited 
by  statute,  a  corporation,  like  an  individual,  may  pre- 
fer creditors.'* 

The  majority  of  jurisdictions,  however,  agree  that 
preference  after  insolvency  cannot  be  made,  for  the 
reason  that  equity  then  proceeds  to  administer,  and  in 
equity  all  creditors  have  equal  equities.^^ 

§  219.  Creditors'  rights  to  a  receiver. —  Courts  of 
equity  may,  in  their  discretion,  appoint  a  receiver  at  the 
suit  of  a  creditor  having  an  express  lien,  created  either 
by  mortgage,  trust  deed,  or  judgment,  when  there  is  uu- 

23.  Vanderpoel  v.  Gorman,  140  N.  Y.  563;  Boynton  v.  Roe, 
114  Mich.  401;  Fietsam  v.  Hay,  122  111.  293;  Boston  Glass  Co. 
V.  Langdon,  24  Pick.  (Mass.)  49;  Catlin  v.  Eagle  Bank,  6  Conn. 
233. 

23.  Rouse  v.  Merchants,  etc..  Bank,  46  Ohio  St.  493;  Trades- 
man Pub.  Co.  V.  Wheel  Co.,  95  Tenn.  634;  Hardware  Co.  v. 
Perry,  etc.,  Mfg.  Co.,  86  Tex.  143;  Cook  v.  Moody,  18  Wash.  114. 

24.  Catlin  v.  Eagle  Bank,  0  Conn.  2.'?3 :  Bank  v.  Potts.  90 
Mich.  345 ;  Bro\vn  v.  Furniture  Co.,  58  Fed.  286 ;  Bank  v.  Dove- 
tail, etc.,  Co.,  143  Ind.  550;  Ford  v.  Hill,  92  Wis.  1S8:  Jefferson 
Bank  v.  Townlev,   159  N.  Y.  490. 

25.  U.  S.  Rubber  Co.  v.  American,  etc..  Co.,  96  Fed.  891; 
Slack  V.  Bank,  103  Wis.  57;  Tate  v.  Association,  97  Va.  74; 
^Memphis  Co.  v.  Ward.  99  Tenn.  172:  Pollak  Co.  v.  ^luscogee  Co., 
108  Ala.  467 ;  Rouse  v.  Bank,  46  Ohio  St.  493. 

14 


210      SUMMARY   OF  LAW   OF   PRIVATE   CORPORATIONS. 

minent  danger  of  the  property  being  wasted,  lost,  or 
misapplied  unless  so  conserved  by  a  receiver.^^  So,  too, 
a  receiver  may  be  ajjpointed  to  reach  the  assets  of  a 
corporation  and  to  prevent  them  from  being  dissipated. 
To  secure  this,  the  creditor  must  ordinarily  show  that 
he  has  a  valid  and  subsisting  claim;  that  there  are  assets 
available  for  its  payment;  that  he  has  exhausted  his 
legal  remedies,  and  that  a  denial  of  the  application 
would  endanger  his  rights,  which  cannot  othenvise  be 
obtained,^^ 

But  "  the  power  of  courts  of  chancery  to  appoint 
receivers  is  a  discretionary  power,  to  be  exercised  with 
great  caution.  To  dispossess  the  owner  of  property  of 
its  possession  before  a  final  hearing  is  a  strong 
measure,  not  to  be  adopted  but  in  a  strong  case.  I 
think  it  should  never  be  done  unless,  without  it,  the 
complainant  would  be  in  danger  of  suffering  irreparable 
loss."  2« 

(b)  The  Creditor  and  the  Shareholder. 

§  220.  "  Upon  principle,  the  true  rule,  it  seems  to 
me,  is  that  where  a  person  has  subscribed  for  or  pur- 
chased stock  in  a  corporation  under  such  circumstances 
that  the  corporation,  and,  through  it,  the  creditors  of 
the  corporation,  can  call  upon  the  stockholder  for  pay- 
ment of  the  unpaid  portion  of  the  capital  stock,  then 
this  claim  is  one  of  law,  based  upon  the  express  or  im- 
plied terms  of  the  subscription  or  purchase  of  the 
stock. 

"  If  subsequently  to  the  subscription  or  purchase,  thus 
creating  a  contract  right  to  call  for  the  unpaid  portions 

26.  Cheever  v.  Rutland,  etc.,  Ry.  Co.,  39  Vt.  653 ;  Des  Moines, 
etc.,  Co.  V.  West,  44  Iowa,  23;  Haas  v.  Chicago,  etc.,  Society,  89 
111.  498. 

27.  Covinirlon.  etc.,  Co.  v.  Rheperd,  21  How.  (02  U.  S.)  112; 
Hollins  V.  Rrierfiold  Co.,  1.50  U.  S.  371;  Falmouth  Rank  v.  Cape 
Cod  Co.,  ItlO  Mass.  .550;  Ft.  Wayne  Co.  v.  Franklin  Co.,  58  N.  J. 
Eq.  579:  affd.,  57  N.  J.  Eq.  7. 

28.  Pullan  v.  Cincinnati,  etc.,  Co.,  4  Riss.   (U.  S.  C.)  35. 


i 


I 


creditors'  rights  and  remedies.  211 

of  the  stock,  an  agreement  is  entered  into  between  the 
corporation  and  the  stockholder,  whereby  the  latter  is 
released  from  liability  on  the  stock  held  by  him,  this 
release,  though  good  between  the  corporation  and  stock- 
holders, may  not  be  binding  upon  creditors,  if  injurious 
to  tliem,  or  in  fraud  of  their  rights;  and,  as  they  are 
not  parties  to  it,  its  validity  may  be  attacked  in  an 
action  at  law. 

"  In  such  a  case  the  plaintiff's  right  of  action  at  law 
would  be  based  upon  the  legal  effect  of  the  original 
contract  of  subscription  or  purchase,  and  the  contract 
of  release  would  be  a  matter  of  defense,  and  when  re- 
lied on  as  such  its  validity  would  be  open  to  investiga- 
tion in  the  law  action.  If  the  release  was  found  to  be 
valid,  not  only  as  against  the  corporation,  but  also 
against  the  creditors,  it  would  then  be  a  good  defense 
against  the  action  based  upon  the  original  contract  of 
subscription  or  purchase.  If,  however,  the  release  was 
found  to  be  in  fact  in  fraud  of  the  rights  of  creditors, 
then  it  would  not  be  binding  upon  them,  and  would  not 
constitute  a  defense  to  the  law  action  based  upon  the 
subscription,  and  the  judgment  would  go  in  favor  of  the 
creditor  upon  the  legal  right  of  recovery  created  by  the 
contract  of  subscription  or  purchase. 

"  If,  however,  by  the  terms  of  the  original  subscrip- 
tion or  purchase,  no  liability  is  assumed  by  the  stock 
purchaser  to  the  corporation  for  any  further  payments 
on  such  stock,  and  it  is  agreed,  as  part  of  the  contract 
of  subscription  or  purchase  between  the  corporation  and 
the  stockholders,  that  the  stock  shall  be  deemed  to  be 
full  paid,  and  it  is  issued  in  this  form,  then  the  cred- 
itors' rights,  if  any,  are  equitable,  and  cannot  he  en- 
forced in  an  action  at  law,  unless  the  statute  of  the 
State  so  provides.  In  such  case  the  creditors  cannot 
declare  at  law  upon  the  original  contract  of  subscrip- 
tion, for  it  created  no  legal  cause  of  action. 


212      SUMMARY  OF  LAW  OF   PRIVATE  CORPORATIONS. 

'•  The  right  of  the  creditors  in  such  a  case  is  based  upon 
the  equitable  doctrine  that  the  capital  stock  is  deemed 
to  be  a  trust  fund  created  for  the  benefit  and  protection 
of  the  creditors  of  the  coqwration.  Unless  expressly 
so  authorized  by  statute,  a  court  of  law  cannot  enforce 
equities,  unless  there  is  also  a  cause  of  action  at  law 
as  the  basis  of  the  proceeding.  In  cases  wherein  a 
person  has  subscribed  for  or  purchased  stock  in  a  cor- 
l^oration,  and  by  the  terms  of  subscription  or  purchase 
viewed  as  a  contract  between  the  corporation  and  the 
stockholders,  the  latter  is  not  bound  for  any  further 
payments  on  the  stock,  but  is  expressly  released  there- 
from; the  creditors  have  no  legal  ground  for  recoveiy 
against  the  stockholder  on  this  contract  of  subscription, 
but  they  may  appeal  to  the  court  for  relief  upon  the 
equitable  grounds  already  suggested."  ^^ 

The  rights  of  creditors  against  shareholders  has  al- 
ready been  spoken  of  ^^  as  well  as  their  rights  against 
officers  and  directors.^^  , 

§221.  Shareholders  as  creditors. —  Shareholders  oc- 
cupy no  fiduciary  relation  to  the  corporation  or  to  the 
creditors,  as  they  have  no  custody  or  control  of  the 
assets  of  the  corporation.  They  may  aid  the  corpora- 
tion by  loaning  it  money,  making  contracts  with  it,  and 
take  evidences  of  their  transactions  by  way  of  notes, 
mortgages,  or  other  security  to  the  same  extent  as  an 
outside  individual  may  do;  and  in  the  absence  of  fraud 
or  collusion,  or  statutory  prohibition,  their  transactions 
cannot  be  attacked  by  other  creditors.^^ 

In  jurisdictions  which  allow  preferences  by  corpora- 
tions insolvent  or  contemplating  insolvency,  they  may 
be  preferred,  and  their  rights  are  the  same  as  other 

29.  Shiras,  J.,  in  First  Nat.  Bank  v.  Peavey,  69  Fed.   455. 

30.  See  Membership  —  Liabilities  to  Creditors,  anle,  p.  140. 

31.  See  Management  —  Directors'  Liabilities,  ante,  p.  10.3. 

32.  Duncomb  V.  New  York,  etc.,  Ry.  Co.,  84  N.  Y.  190;  Mer- 
rick V.  Peru,  etc.,  Co.,  61  111.  472. 


I 


CREDITORS      RIGHTS    AND    REMEDIES.  213 

creditors  in  obtaining  preference  hj  execution,  attach- 
ment, or  other  legal  process.^' 

This  rule  does  not  apply  when  the  shareholder  is 
a  director,  trustee,  or  other  managing  officer,  as  already 
stated,  who  takes  advantage  of  his  position  to  obtain 
preference  over  other  creditors. 

§  222.  Right  of  creditors  to  have  par  value  of  shares 
paid  in. —  It  has  never  been  questioned  that  where  a 
subscriber  makes  an  agreement  with  the  coi*poration  to 
accept  shares  as  fully  paid  up,  upon  which  he  has  paid 
only  a  part  of  the  par  value,  and  there  is  neither  fraud 
or  secrecy  on  the  part  of  either,  that  the  contract  as 
between  the  subscriber,  the  eori^oration,  and  the  share- 
holder is  inviolable  for  the  reason  that  the  corporation 
is  estopped  to  claim  more  than  agreed  upon  and  the 
other  shareholders  have  assented  to  the  arrangement. 
But  the  trust  fund  theory,  based  as  it  in  part  is  on  the 
doctrine  of  notice  to  the  public,  is  responsible  for  the 
general  rule  that  the  law  implies  a  promise  on  the  part 
of  the  subscriber  to  pay  for  the  shares  at  par,  and  the 
courts  have  generally  adopted  the  rule  that  "  the  accept- 
ance of  a  certificate  of  stock,  not  fully  and  actually  paid 
up,  ipso  facto,  obligates  the  holder  to  make  up  its  par 
value  if  the  dutv  of  the  corporation  to  its  creditors 
requires  it."  ^^ 

The  reasoning  behind  this  is  that  the  original  con- 
tract was  to  pay  the  par  value,  and  that  the  insertion 
of  the  word  "  nonassessable,"  etc.,  is  a  stipulation 
against  a  liability  beyond  the  par  value,  and  further 
that  the  issue  of  such  a  certificate  to  the  shareholder 
before  he  has  fully  paid  up  does  not  vary  his  contract.^^ 

§  223.    A  distinction  is  made,  however,  between  the 

33.  Idem.     See  also  Snr£ront  v.  Webster,  13  Mete.   (Mas*.)   407; 
Whitwell  V.  Warner.  20  Vt.  425. 

34.  See  Flinn  v.  Bawlev.  7  Fed.  785.  and  eases  therein  cited. 

35.  Upton  V.  Tribilcock.  91  U.   S.   45;   Hawley  v.  Upton,   102 
U.  S.  314. 


214      SUMMARY  OF  LAW   OF   I'RIVATE  COKPORATIONS. 

original  issue  of  shares  at  the  time  of  incorporation,  and 
a  subsequent  issue  after  the  corporation  is  a  "  going 
concern."  The  rule  already  stated  apj)licis  to  the 
original  subscription,  and  even  in  the  absence  of  statute 
■svill  be  enforced  at  the  request  of  creditors  or  their 
representatives.  But  the  latter  question  has  been  the 
subject  of  considerable  judicial  interpretation, —  and 
it  seems  to  be  the  weight  of  authority  that  when  it  be- 
comes necessary  in  order  to  save  a  ''  going  concern,''  or 
it  is  thought  advisable  to  increase  the  capital  stock  in 
order  to  "  better  "  the  plant  or  business  of  the  com- 
pany, it  may  issue  such  shares  and  sell  them  at  the 
market  value,  provided  it  be  done  in  good  faith  and  not 
as  a  mere  cover  for  an  illegal  increase. 

"  To  say  that  a  cor])oration  may  not,  under  the  cir- 
cumstances above  indicated,  put  its  stock  upon  the  mar- 
ket and  sell  it  to  the  highest  bidder,  is  practically  to  de- 
clare that  a  coiporation  can  never  increase  its  capital 
by  a  sale  of  shares,  if  the  original  stock  has  fallen  below 
par.  The  wholesome  doctrine,  so  many  times  enforced 
by  this  court,  that  the  capital  stock  of  an  insolvent  cor- 
poration is  a  trust  fund  for  the  payment  of  its  debts, 
rests  upon  the  idea  that  the  creditors  have  a  right  to 
rely  upon  the  fact  that  the  subscribers  to  such  stock 
have  put  into  the  treasury'  of  the  corporation,  in  some 
form,  the  amount  represented  by  it;  but  it  does  not 
follow  that  every  creditor  has  a  right  to  trace  each  share 
of  stock  issued  by  such  corporation,  and  inquire  whether 
its  holder,  or  the  person  of  whom  he  purchased,  has 
paid  its  par  value  for  it.  It  frequently  happens  that 
corporations,  as  well  as  individuals,  find  it  necessary  to 
increase  their  ca])ital  in  order  to  raise  money  to  pros- 
ecute their  business  successfully,  and  one  of  the  most 
frequent  metliods  resorted  to  is  that  of  issuing  new 
shares  of  stock  and  ]iutting  thorn  upon  the  market  at 
the  host  ])rioe  that  can  ho  ol)tained;  and  so  long  as  the 


creditors'  rights  ais^d  remedies.  215 

transaction  is  bona  fide,  and  not  a  mere  cover  for 
"  watering  "  tlie  stock,  and  the  consideration  obtained 
represents  the  actual  value  of  such  stock,  the  courts 
have  shown  no  disposition  to  disturb  it.  Of  course  no 
one  would  take  stock  so  issued  at  a  greater  price  than 
the  original  stock  could  be  purchaser  for,  and  hence  the 
ability  to  negotiate  the  stock  and  to  raise  the  money 
must  depend  upon  the  fact  whether  the  purchaser  shall 
or  shall  not  be  called  upon  to  respond  for  its  par 
value."  ^« 

Many  of  the  States  have  statutes  providing  that 
shares  of  stock  may  be  paid  for  in  cash,  property,  or 
services.  In  case  the  shares  be  issued  for  property,  the 
interesting  question  to  the  creditor  is  as  to  the  valua- 
tion placed  upon  the  property,  and  there  have  been  any 
number  of  instances  where  creditors  have  questioned 
the  valuation  on  the  basis  of  fraud,  etc. 

§  224.  Good  will  as  consideration  for  stock. —  It  is  now 
no  longer  questioned  that  good  will  is  property  and  in 
many  instances  a  valuable  property.  "  The  individual 
who  has  created  it  by  years  of  hard  work  and  fair  busi- 
ness dealings  usually  experiences  no  difficulty  in  finding 
men  willing  to  pay  him  for  it,  if  he  be  willing  to  sell  it 
to  them."  Being  property  it  may  be  used  as  the  pay- 
ment for  shares  in  a  corporation.  Its  value,  however, 
is  not  easily  determined,  but  will  depend  upon  the  con- 
ditions existing  in  a  particular  case,  and  tlie  courts  are 
loath  to  question  the  valuation,  if  it  appear  to  have 
been  made  in  good  faith  and  upon  reasonable  and  exist- 
ing facts.^^ 

36.  Brown,  J.,  in  Handley  v.  Stutz,  139  U.  S.  417.  See  also 
Van  Cott  V.  Van  Brnnt,  82  K.  Y.  535;  Stine  v.  ITowaril.  ^5  Cal. 
616;  Christenson  v.  Eno,  106  N.  Y.  97;  Dummer  v.  Smedley, 
110  Mich.  466.  Contra.  Richardson  v.  Green.  13.3  U.  S.  30:  Cole- 
man V.  Howe,  154  111.  458:  Peter  v.  Union  Co..  56  Ohio  St.  181. 

37.  Washburn  v.  National,  etc.,  Co.,  81  Fed.  17,  and  cases 
cited. 


21G      SUMMARY   OF  LAW   OF   PRIVATE   CORPORATIONS. 

It  is  true  that  the  basis  of  valuation  of  good  will,  as 
well  as  other  property,  may  turn  out  to  have  been  an 
error  of  judgment,  but  the  courts  allow  for  an  honest 
difference  of  opinion,  and  will  uphold  a  valuation  if 
honestly  made,  though  it  turn  out  to  have  been  excess- 
ive. ''  The  transaction  may  be  impeached  for  fraud, 
but  not  for  error  of  judgment,  inasmuch  as  good  faith 
and  the  exercise  of  an  honest  judgment  is  all  that  is 
required."  ^* 

§  225.  The  valuation  of  property  other  than  good  will. 
— ''  From  this  pro^DOsition  (the  trust  fund  idea  that  ^11 
shares  must  be  paid  for  in  money  or  its  equivalent  at 
the  face  value)  two  apparently  conflicting  and  incon- 
sistent rules  have  grown  up,  one  of  which  may  be  called 
the  "  true-value  rule,"  and  the  other  the  "  good-faith 
rule."  Courts  adopting  the  good-faith  rule  are  also 
divided  on  the  proposition  as  to  what  is  necessary'  to 
be  shown  to  constitute  good  faith.  Some  of  them  hold 
that,  in  the  absence  of  an  affirmative  showing  of  fraud 
aliunde,  mere  overvaluation  of  the  property  given  in 
exchange  for  stock  will  not  render  the  stockholder 
liable  for  the  difference,  while  others  hold  that  over- 
valuation itself,  especially  if  gross,  constitutes,  or  at 
least  raises  a  strong  presumption  of  fraud."     *     ^     * 

§  226.  True- value  rule. — "  There  is  nothing  in  these 
decisions  or  in  the  statutes  that  inhibits  the  taking  of 
property  in  exchange  for  stock,  providing  it  is  taken  at 
its  true  value;  and  this  value  we  do  not  think  should 
in  all  instances,  if  in  any,  be  measured  by  results.  The 
]")arties  have  the  right  in  good  faith  to  agree  on  the 
\'aluo  of  the  property  taken,  Imt  this  should  not  be  a 
s])eculative  or  fictitious  one.  An  honest  mistake  in 
judgment  will  not  necessarily  destroy  the  value  agreed 

38.  Douplas  v.  Ireland.  73  N  Y.  100.  See  also  Coit  v.  Gold, 
etc..  Co..  119  T^.  S.  34.3:  Graves  v.  Brooks,  117  Mich.  424:  Becklev 
V.  Schlav,  40  N.  J.  Eq.  533. 


creditors'  rights  and  remedies.  217 

upon,  but  it  must  be  such  a  valuation  as  prudent  and 
sensible  business  men  would  approve.      *      *      *  "  39 

§  227.  Good-faith  rule. — As  stated,  the  courts  are 
divided  on  the  good-faith  rule.  A  number  assert  that 
"  it  is  necessary  to  establish  either  an  intentional  fraud 
in  fact,  or  such  reckless  conduct  in  fixing  the  value  of 
the  property  conveyed,  without  regard  to  its  actual 
value,  that  an  intent  to  defraud  may  be  inferred;"  ^*^ 
while  others  assert  that  ''  all  that  is  necessary  to  estab- 
lish the  legal  fraud  '^  *  *  is  to  prove  two  facts:  1st. 
That  the  stock  issued  exceeded  in  amount  the  value  of 
the  property  in  exchange  for  wliich  it  was  issued;  and, 
2nd.  That  the  tnistees  deliberately,  and  with  knowledge 
of  the  real  value  of  the  property  overvalued  it,  and  paid 
in  stock  for  it  an  amount  which  they  knew  ^vas  in  excess 
of  its  actual  value.  The  value  must  be  determined  in  any 
action  in  which  the  question  arises  upon  such  evidence 
as  may  be  given,  having  respect  to  the  circumstances 
and  the  nature  of  the  property,  and  the  scienter  and 
guilty  action  of  the  trustees  may  be  proved  either  di- 
rectly or  inferred  from  circumstances."  ^^ 

§  228.  Payment  of  shares  —  how  enforced  by  creditor. 
—  The  usual  method  of  enforcing  the  payment  of 
shares  in  full  is  by  bill  in  equity.  Inasmuch  as  equity 
has  the  right  to  appoint  a  receiver  or  trustee,  the  most 
direct  proceeding  is  to  apply  for  such  receiver  and  it 
then  becomes  his  duty  to  see  that  all  moneys  owmg  to 
the  corjioration  are  paid.'*^  If,  however,  the  receiver 
be  delinquent  in  the  discharge  of  his  duties,  the  cred- 
itor has  a  standing  in  court  to  enforce  the  proper  dis- 
tribution of  the  cor|-)orate  assets.*^ 

39.  Deemer,  J.,  in  State  Trust  Co.  v.  Turner.  Ill  Iowa,  664, 
citing  an  extensive  list  of  cases  supporting  each  of  the  three 
rules. 

40.  Graves  v.  Brooks.  117  Mich.  424. 

41.  Douglass  v.  Ireland,  73  N.  Y.   100. 

42.  Dalton.  etc.,  Rv.  Co.  v.  McDaniel.  .56  Ga.  191;  Potter  v. 
Dear,  05  Cal.  578:  Hatch  v.  Dana.  101  U.  S.  205. 

43.  Pfohl  v.  Simpson.  74  N.  Y.  137. 


218      SUMMARY  OF  LAW   OF   FRIVATE   CORPORATIONS. 

^'  The  liaLility  of  a  subscriber  for  the  capital  stock  of 
a  company  is  several,  and  not  joint.  By  his  subscrip- 
tion each  becomes  a  several  debtor  to  the  company,  as 
much  so  as  if  he  had  given  his  promissory  note  for 
the  amount  of  his  subscription.  At  law,  certainly,  his 
subscription  may  be  enforced  against  him  without  join- 
der of  other  subscribers;  and  in  equity  his  liability 
does  not  cease  to  be  several.  It  may  be  that  if  the 
object  of  the  bill  is  to  Avind  up  the  affairs  of  this  cor- 
poration, all  the  shareholders,  at  least  so  far  as  they 
can  be  ascertained,  should  be  made  parties,  that  com- 
plete justice  may  be  done  by  equalizing  the  burdens, 
and  in  order  to  prevent  a  multiplicity  of  suits."  ^^ 

In  an  action  to  obtain  a  judgment  out  of  the  impaid 
stoctlv  of  a  corporation,  one  shareholder  alone  may  be 
made  defendant,  but  more  may  be  and  usually  all  are 
brought  in  as  defendants.^^ 

In  bringing  such  an  action,  however,  it  is  the  general 
rule  that  one  creditor  may  not  sue  in  his  own  name, 
but  must  sue  on  behalf  of  all  the  creditors,*'^  unless  the 
statute  expressly  provide  for  such  an  action,  as  it  does 
in  several  States.  The  reason  for  this  is  that  the  un- 
paid subscriptions  to  capital  stock  remain  a  fund  for 
all  the  creditors. 

§  229.  Legal  relations  among  creditors. —  A  creditor 
who  occupies  no  relation  toward  the  solvent  corporation 
owes  no  duty  to  other  creditors  and  may  generally  sue 
the  corporation  without  regard  to  the  effect  his  action 
will  have  upon  the  other  creditors.  But  when  the  cor- 
poration becomes  insolvent,  the  assets  then  belong  to 
all  the  creditors  for  ratable  distribution,  and  generally. 


44.  Hatch  v.  Dana,  101  U.  S.  205. 

45.  kU'iii ;   Baines  v.  I'abcoek,  !)o  Cal.  oSl  ;   Siegel  v.  Andrews, 
181  111.  .3r,o. 

46.  Coleman  v.   Howe.   154  111.   458;    Patterson  v.   Lynde,   106 
U.  S.  519;  Foster  v.  Posson,  105  Wis.  99. 


creditors'  rights  and  remedies,  219 

no  one  creditor  may  gain  priority  over  the  others  by 
suit  or  execution. 

Creditors  who  are  also  shareholders  occupy  no  rela- 
tion toward  the  corporation,  save  that  when  the  cor- 
poration is  insolvent  they  may  not  offset  against  his 
indebtedness  to  the  corporation  the  indebtedness  of  the 
corporation  to  him.  They  must  pay  the  amount  due  by 
them,  and  they  then  come  in  on  the  same  basis  as  other 
creditors  and  share  ratably  with  them.^^ 

Creditors  who  are  shareholders  and  directors  or  trus- 
tees occupy  a  dual  relationship,  and  in  enforcing  his 
rights  this  dual  capacity  is  distinguished.  As  already 
stated,  the  weight  of  authority  is  in  favor  of  the  rule 
that  a  director-creditor  may  not  take  advantage  of  his 
superior  knowledge  to  secure  priority  of  claims  against 
the  corporation.  But  they  certainly  occupy  as  good  a 
position  as  other  creditors,  and  are  entitled  to  share 
pro  rata  Avith  other  creditors.'*^ 

47.  Sawyer  v.   Hoag.   17  Wall.   610;    Lawrence  v.   Nelson,  21 
N.  Y.  157. 

48.  Bristol,  etc.,  Co.  v.  Probasco,  64  Ind.  406. 


OIIAPTEK  XI. 

Consolidation;     Reorganization;     Pooling     Agree- 
ments; Voting  Trusts;  Trust  Combinations. 

Consolidation. 

§  230.  Meaning. —  By  consolidation  is  meant  a  merg'- 
ing  of  two  or  more  corporations  into  one  corporate 
body,  whereby  their  powers,  properties,  rights  and 
privileges,  together  with  their  obligations  and  duties  in- 
ure to  and  devolve  upon  the  new  corporate  body.  Legis- 
lative sanction  is  necessary,^  and  the  effect  of  the 
consolidation,  whether  the  old  companies  are  dissolved, 
a  new  one  takes  their  place,  or  whether  the  identity 
of  one  remains  and  the  others  disappear,  or  whether 
there  is  simply  a  combination  of  the  two  or  more  iden- 
tities, will  all  depend  upon  the  statute,  which  must 
guide  in  each  particular  instance. 

§  231.  Methods  of. —  Generally  speaking  there  are 
three  methods  of  consolidation  with  w^iich  the  law  is 
familiar:  (1)  The  merging  of  two  or  more  corjwra- 
tions,  whereby  one  of  the  constituent  companies  re- 
mains in  existence,  taking  unto  itself  all  the  rights, 
privileges,  duties,  etc.,  of  the  others  which  are  dis- 
solved thereby.  (2)  The  merging  of  two  or  more  cor- 
porations into  a  new  one  whereby  all  rights,  duties, 
etc.,  are  transferred  to  the  new  one  and  all  of  the  old 
companies  are  dissolved;  and  (3)  the  mei-gnng  or  com- 
bination of  several  companies,  all  of  which  remain  in 
existence,  but  controlled  by  one  set  of  officers  and 
directors,  in  other  words,  tlie  one  entity  controlling 
and  guiding  the  several  constituent  companies. 

To  make  a  valid  consolidation,  both  parties  must  be 

1.  Morawetz,  §  940;  1  Thompson,  §  315. 

[220] 


COXSOLIDATIOX.  221 

competent,^  i.  e.,  the  legislative  authority  must  be  given 
to  each  constituent,^  Consolidation,  while  dependent 
upon  the  will  of  the  State,  cannot,  however,  be  forced 
upon  corporations,*  but  if  the  corporations  choose  to 
consolidate,  they  subject  themselves  to  the  laws  then 
in  force,  for  the  effect  of  consolidation  depends  upon 
the  will  and  purpose  of  the  legislature  and  not  of  the 
corporations,^  and  this  authority  may  be  expressed 
either  by  charter  or  by  independent  statute.^  Orig- 
inally, consolidation  was  authorized  by  special  acts, 
but  general  statutes  have  been  enacted  in  most  of  the 
States  allowing  consolidation  and  these  statutes  are 
both  permissive  and  restrictive.  The  permissive  stat- 
utes allow  consolidation  of  various  kinds  of  coi-pora- 
tions  under  various  conditions,  while  restrictive  statutes 
have  tried  to  prevent  the  consolidation  of  corporations 
when  consolidation  wovild  tend  to  stifle  competition  or 
create  monopolies. 

§  232.  The  common-law  iiile — Corporations  have  no 
power  at  common  law  to  consolidate  or  form  partner- 
ships,'^ for  the  charter  measures  the  coi-porate  powers, 
and  the  general  rule  of  interpretation  is  that  the  cor- 
poration may  do  only  those  things  authorized  by  the 
charter;  lack  of  prohibition  will  not  be  taken  as  con- 
sent on  the  part  of  the  State. 

While  this  is  the  general  rule  in  England  and  most 
of  our  States,  the  policy  in  iSTew  York  seems  to  have 
been  to  allow  the  fullest  scope  for  the  consolidation 
of  noncompeting  railroads."^ 

2.  Louisville,  etc.,  Ry.  Co.  v.  Kentucky,  161  U.  S.  677. 

3.  Penn.  Rv.  Co.  v.  St.  Louis,  etc..  Rv.  Co.,  118  U.  S.  2n0. 

4.  Mason  v.  Finch,  28  Mich.  282. 

5.  State  V.  Maine,  etc.,  Ry.  Co.,  66  Me.  488;  Charlotte,  etc., 
Ry.  Co.  V.  Gibbes,  27  S.  C.  38.5. 

6.  Philadelphia,  etc.,  Rv.  Co.  v.  ^Maryland,  10  How,  (51  U.  S.) 
376. 

7.  Whitterton  Mills  v.  Upton,  10  Gray  (Mass.),  582;  People  v. 
North  River,  etc.,  Ref.  Co..  121   X.  Y.  582. 

8.  Woodruff  V.  Erie  Ry.  Co.,  93  N.  Y.  609. 


222      SUMMARY   OF  LAW   OF   PRIVATE   CORPORATIONS. 

§  233.  stockholder's  consent. —  It  is  a  general  prin- 
ciple of  the  law  that  the  original  contract  under  which 
a  stockholder  became  such  cannot  be  altered  without 
his  consent,  therefore  every  stockholder  in  the  con- 
solidating bodies  must  consent,  unless  the  statute  or 
enabling  act,  in  force  at  the  time  of  the  creation  of  the 
corporation  provides  specifically  for  a  stated  majority 
vote.^  Such  consent  may  be  either  express  or  implied, 
or  it  may,  under  peculiar  circumstances,  be  dispensed 
with.  It  may  be  given  expressly  by  the  executor  of  a 
deceased  stockholder,  by  power  of  attorney,  by  a  trustee 
in  whose  name  the  stock  stands,  and  it  may  be  given  in 
advance  of  action  and  agreement  by  the  directors.  ^*^ 

It  is  impliedly  given  by  a  shareholder  when,  at  the 
time  he  became  such,  there  is  a  lawful  power  to  con- 
solidate given  either  in  charter,  general  laws,  or  inde- 
pendent statutes. 

It  may  be  dispensed  with  when  a  stockholder  negli- 
gently withholds  his  consent  so  that  his  rights  have 
been  lost  by  laches,  or  he  has  by  his  own  acts  estopped 
himself.^^ 

§234.  Unauthorized  consolidation. —  Unauthorized 
consolidation  is  subject  to  direct  attack  by  the  State, 
for  it  is  a  capital  offense  for  the  artificial  persons  who 
engage  in  it,  and  a  judgment  of  corporate  death  may 
follow  as  a  result  of  the  illegal  transaction.^^  ISTot  only 
may  the  State  attack,  but  in  New  York  it  may  be 
attacked  in  a  taxpayer's  action  to  set  aside  or  annul  a 
municipal  act,  where  such  is  a  necessary  factor  in  the 
attempted  consolidation.^^ 

9.  Clearwater  v.  Meroditli.  1   WnU.    (08  V.  S.)    24. 

10.  Market  St.  Ry.  Co.  v.  Hellman,  109  Cal.  571. 

11.  Rabe  v.  Dunlap,  51  N.  J.  Eq.  40;  Branch  v.  Jessup,  106 
U.  S.  468. 

12.  People  V.  Sugar  Ref.  Co..  121  N.  Y.  582. 

13.  Bohmer  v.  Haffcn,  161  N.  Y.  390. 


I 


CONSOLIDATION.  223 

The  general  rule,  however,  is  that  it  is  the  pre- 
rogative of  the  State, .and  individuals  cannot  maintain 
an  action  to  determine  the  invalidity  of  a  consolida- 
tion,^'* but  this  is  too  broad  a  statement,^^  for  many  in- 
stances exist  where  the  constituent  companies,  the  stock 
holders,  and  creditors  have  successfully  attacked  the 
consolidation. 

The  status  of  constituent  companies  has  received  a 
variety  of  constructions;  In  Indiana  and  Illinois  the 
courts  have  refused  to  enforce  agreements  of  this 
kind;^^  in  IsTew  York  a  lower  court  declared  that  the 
constituent  companies  had  no  standing  and  could  not 
maintain  any  action  for  profits  since  such  an  action 
calls  for  the  enforcement  of  the  unlawful  agreement  ;^^ 
while  other  courts  have  adopted  the  quasi-contract  rule 
and  declare  that  while  no  action  can  be  maintained 
upon  the  agreement,  yet  if  one  party  has  benefited  at 
the  expense  of  the  other,  it  will  not  be  permitted  to 
retain  the  benefit,  while  repudiating  the  agreement.^® 

§  235.  Shareholders'  rights  under. —  Stockholders  can- 
not be  forced  into  a  consolidated  company,  and  their 
rights  in  this  respect  are  not  affected  by  the  legality  of 
the  consolidation.  The  relief  usually  sought  is  injunc- 
tion to  prevent,  but  it  is  not  so  clear  that  a  stockholder 
can  prevent  consolidation,  provided  the  majority  desire 
to  consolidate  and  legislative  permission  is  secured.  ^^ 

14.  Farmers,  etc.,  Co.  v.  Toledo,  etc.,  Rv.  Co.,  67  Fed.  49; 
Continental,  etc.,  Co.  v.  Toledo,  etc..  Rv.  Co.,  82  Fed.  642;  Tor- 
hune  V.  Midland  Ry.  Co.,  38  N.  J.  Eq.  423. 

15.  American  Loan,  etc.,  Co.  v.  Minnesota,  etc.,  Co.,  157  111. 
641  ;  Mansfield,  etc..  Ky.  Co.  v.  Brown,  20  Ohio  St.  223. 

16.  Ketcham  v.  Madison,  etc.,  Co.,  20  Ind.  260;  Peoria,  etc., 
Co.  V.  Coal,  etc.,  Co.,  68  111.  489. 

17.  Gray  v.  Oxnard.  .59  Hun   (X.  Y.).  387. 

18.  Greenville  Co.  v.  Planters'  Co.,  70  Miss.  669;  Manchester, 
etc.,  Co.  V.  Concord  Co.,  66  N.  H.   100. 

19.  Kean  v.  Johnson,  9  N.  J.  Eq.  401 ;  Black  v.  D.  &  H.  Canal 
Co.,  24  N.  J.  Eq.  455;  Treadwell  v.  Salisbury  Co.,  7  Gray  (Mass.), 
393. 


224      SUMMAKY   OF  LAW   OF   I'laVATE   COUroKATIOXS. 

Provision  is  iisiially  made  for  dissenting  stockholders 
who  refnse  to  come  in,  Avhereby  their  rights  are  secured. 
Upon  principle  and  in  the  absence  of  statute,  a  share- 
holder ought  to  be  able  to  prevent  consolidation  on  the 
constitutional  ground  of  an  impairment  of  contract,'*'  yet 
this  is  met  by  the  stockholders'  agreement  to  abide 
by  the  majority  rule;  and  it  seems  that  v/here  the 
majority,  in  good  faith,  decide  that  a  sale  or  consoli- 
dation is  the  only  solution,  all  the  stockholder  can  do 
is  to  seek  the  aid  of  equity  in  securing  his  rights.^^ 

Where  a  corporate  combination  has  been  adjudged 
illegal  and  void,  a  shareholder  in  it  can  force  an  ac- 
counting and  distribution  of  the  assets. ^^ 

§  23 G.  Creditors'  rights  under. —  Creditors'  rights 
under  illegal  consolidation  have  already  been  dis- 
cussed.^^ Under  the  rule  of  several  jurisdictions,  cred- 
itors had  no  standing  where  ultra  vires  was  pleaded. 
In  other  jurisdictions  estoppel  is  the  rule,  and  even 
in  jurisdictions  allowing  ultra  vires  as  a  defense,  the 
creditor  may  disaffirm  the  contract  and  sue  on  quasi- 
contract. 

The  statute  allowing  consolidation  usually  regulates 
the  liability  of  the  consolidated  company,  and  may  im- 
pose not  only  all  the  burdens  and  all  the  liabilities  of 
the  old  companies,  but  new  and  additional  burdens  and 
liabilities.  Of  course,  statute  may  relieve  the  consoli- 
dated company  from  burdens  and  liabilities. 

In  the  absence  of  express  provisions,  the  general 
rule  is  that  where  corporations  are  consolidated  the 
consolidated  company  takes  the  property  and  franchises 
of  the  old  companies  subject  to  the  same  burdens  which 
attached  under  the  original  charters. 

20.  Stevens   V.   ■Rutland,    etc..   Rv.    Co..   29   Vt.    545;    Kean   v. 
Johnson,  9  N.  J.  Eq.  401. 

21.  Treadwell  v.  .Salisbury  Co..  7  Gray   (Mass.),  .393.. 

22.  Havenieyer  v.  Brooklyn  Sugar  Ref.  Co.,  26  Abb.  N.  C.  157. 

23.  See  Ultra  Vires,  ante,  p.  78. 


EEOKGANIZATION.  225 

"  For  the  purpose  of  answering  for  the  liabilities  of 
the  constituent  corporations  the  consolidated  com- 
pany should  be  deemed  to  be  merely  the  same  as  each 
of  its  constituents,  their  existence  continued  in  it,  un- 
der the  new  form  and  name,  their  liabilities  still  exist- 
ing as  before,  and  capable  of  enforcement  against  the 
new  company  in  the  same  way  as  if  no  change  had 
occurred  in  its  organization  or  name."  ^* 

If  a  new  corporation  is  formed  and  the  constituent 
companies  are  dissolved,  creditors  cannot  maintain  ac- 
tions against  them  after  dissolution,  unless  their  ex- 
istence be  continued  for  the  purpose  of  adjusting  their 
liabilities.  The  only  remedy  is  against  the  consoli- 
dated company,  or  in  equity  against  the  assets  of  the 
consolidating  companies  in  the  hands  of  the  consoli- 
dated company.  Creditors  of  a  corporation  cannot  pre- 
vent consolidation  or  dissolution,  but  they  cannot  be 
deprived  of  their  rights  to  follow  the  property  of  the 
corporation  into  the  hands  of  the  consolidated  cor- 
poration.^'' 

IcEOKGAlSriZATIGN. 

§237.  Meaning  of  term. —  The  tenn  "reorganiza- 
tion "  has  never  been  defined  under  the  law.  It  is  in 
frequent  use,  however,  and  is  generally  understood  to 
embrace  the  various  transactions  by  which  existing  cor- 
porations are  continued  under  a  different  organization 
or  management,  or  it  may  mean  the  succession  of  a  new 
entity  to  the  property,  assets,  and  rights  of  an  exist- 
ing corporation.  The  method  of  reorganization  and 
its  effect  must  depend  wholly  upon  the  statute  allowing 

24.  Indianapolis,  etc.,  Ry.  Co.  v.  Jones,  29  Ind.  465.  See  also 
Mt.  Pleasant  v.  Beckwith,  100  U.  S.  514;  Western  Union  Ry.  Co. 
V.  Smith,  75  111.  496;  Boardman  v.  Lake  Shore,  etc.,  Ry.  Co.,  84 
N.  Y.  157. 

25.  Chicago,  etc.,  Ry.  Co.  v.  Moffitt,  75  111.  524;  New  Bedford 
Ry.  Co.  V.  Old  Colony  Co.,  120  Mass.  397 ;  Compton  v.  Wabash 
Ry.  Co.,  45  Ohio  St.  592. 

15 


226      SUMMARY   OF  LAW   OF   PRIVATE   CORPORATIONS. 

it,  coupled  with  the  intent  of  the  parties.  Most  State 
legislatures  have  granted  the  right  to  reorganize  under 
certain  conditions,  the  object  being  to  afford  a  con- 
tinuance of  a  corporation,  the  property  and  franchises 
of  which  have  been  sold  under  a  mortgage,  or  any 
judicial  sale,  or  under  execution. 

This  succession  or  reorganization  takes  place  when 
the  property  and  franchises  of  a  corporation  are  trans- 
ferred to  another  corporation  which  takes  the  place 
of  the  old  one.  It  differs  from  a  consolidation  in  the 
matter  of  its  liability  for  debts,  for  as  we  have  seen, 
a  consolidated  company  usually  assumes  all  the  liabili- 
ties of  the  corporations  of  which  it  is  formed. 

A  mere  transfer  of  the  assets  of  one  coi-poration  to 
another  does  not  establish  any  legal  identity  between 
them,^®  and  if  one  corporation  lawfully  becomes  the 
owner  of  the  property  and  franchises  of  another,  it 
will  hold  them  free  from  the  debts  of  the  latter,  which 
were  not  prior  liens  thereon,  unless  an  obligation  to 
pay  them  is  expressly  assumed."^ 

When  therefore  a  new  corporation  is  formed,  with 
different  stocikholders,  it  cannot  be  attacked  by  the 
creditors,  or  held  liable  for  the  debts  of  the  old  cor- 
poration, except  upon  some  special  ground,  such  as 
an  express  contract,  fraud,  or  receiving  assets  of  the 
old  corporation  ^\^thout  giving  value  therefor.^® 

§  238.  Authority  for, —  Authority  to  reincorporate 
must  come  from  the  same  source  as  the  right  to  incor- 
porate.^ Such  authority  has  very  generally  been 
granted  under  the  general  laws  in  the  various  States. 

The  power  of  a  corporation  to  transfer  its  property 
and  franchise  has  already  been  referred  to.    Generally, 

26.  Tawas,  etc.,  Ry.  Co.  v.  Circuit  Judge,  44  Mich.  479. 

27.  BnifTott  V.  Great  Western  Rv.  Co.,  2.5  111.  353. 

28.  Donnally  v.  Hearndon,  41  W.  Va.  519;  McClellan  v.  De- 
troit File  Works.  .56  Mich.  579. 

29.  People  v.  De  Gramv,  62  Hun,  224;  s.  c,  133  N.  Y.  254. 


KEORGAXIZATIO^'^.  227 

a  private  coriDoration  mar,  if  the  exigencies  of  the  busi- 
ness require  it,  dispose  of  the  property  and  franchise, 
and  wind  up  its  business.  In  doing  this,  there  is  nothing 
to  prevent  their  sale  to  another  corporation,  nor  is 
there  anything  to  prevent  payment  therefor  in  stock  of 
the  new  company,  provided  the  stockholders  consent 
thereto  and  creditors  are  not  prejudiced  thereby. 
Quasi-public  corporations  must  have  express  consent 
of  the  State,  before  this  can  be  done. 

§  239.  Methods. —  Reorganization  of  a  corporation 
may  be  brought  about  in  various  ways.  The  reason  for 
reorganization  is  usually  to  rehabilitate  a  company  that 
is  actually  or  inmiinently  in  danger  of  insolvency.  This 
is  usually  done  in  one  of  three  Avays :  ( 1 )  by  reorganiza- 
tion without  foreclosure;  (2)  by  transfer  of  the  prop- 
erty to  a  new  corporation;  or  (3)  by  foreclosure  and 
sale  under  mortgage,  trust  deed,  or  other  judicial  sale. 

Tlie  first  is  a  voluntary  reorganization  and  requires 
the  assent  of  all  parties  concerned.  It  is  effected  by  an 
agreement  between  the  bondholders  and  stockholders 
under  which  the  bonds  and  stocks  of  the  company  are 
readjusted  so  as  to  allow  the  company  to  continue  busi- 
ness without  a  foreclosure,  the  stock  and  bondholders 
taking  new  stock  and  bonds  differing  from  the  old  in 
amount,  rate  of  interest,  and  priority  of  lien. 

The  second  method  is  also  a  voluntary  reorganiza- 
tion whereby  all  the  property  of  the  corporation  is 
transferred  to  a  new  corporation,  either  by  lease  or 
absolute  sale.  ]SJ"onassenting  bondholders  or  stocik- 
holders  cannot  be  forced  into  such  a  transaction  nor 
can  unsecured  creditors  be  prevented  from  following 
the  property  into  the  hands  of  the  new  company.  If 
carried  out,  it  must  be  carried  out  in  good  faith  and  in 
the  interest  of  all  parties."^ 

30.  Lauman  v.  Lebanon,  etc.,  Rv.  Co.,  30  Pa.  St.  42:  People 
V.  Ballard,  134  N.  Y.  269;  Elyton  Land  Co.  v.  Dowdell,  113  Ala. 
177. 


228      SUMMARY  OF   LAW   OF   PRIVATE   CORPORATIONS. 

By  the  third  method  where  a  corporation  has  issued 
bonds  and  given  a  trust  deed  to  secure  the  same,  and 
becomes  embarrassed  and  unable  to  pay  the  interest  or 
principal  thereon,  the  bondholders  usually  formulate 
a  scheme  for  reorganization,  and  enter  into  an  agree- 
ment, appoint  a  committee  or  agent  to  represent  them 
and  purchase  the  property  at  a  foreclosure  sale.  A 
new  company  is  then  formed,  and  the  property  is  trans- 
ferred to  it  in  return  for  stock  and  bonds  to  be  issued 
in  accordance  with  the  agreement.  Such  agreements 
are  not  only  legal  but  are  favored  by  the  law.^^ 

Such  agreements  must  be  carried  out  in  the  interest 
of  all  the  bondholders,  for  any  special  agreement  with 
a  portion  of  bondholders  to  give  them  an  advantage 
over  the  others  is  a  fraud  and  illegal  and  void.^^ 

Any  person  may  purchase  at  such  sale  whose  relation 
to  the  parties  interested  is  not  such  as  to  make  such  a 
purchase  a  breach  of  trust."^ 

§  240.  Creditors'  rights. —  Unsecured  creditors  have 
only  the  right  to  have  all  the  assets  of  the  corporation 
applied  to  the  payment  of  their  debts  after  the  debts 
secured  by  lien  have  been  secured.  Any  agreement 
between  the  stockholders  and  the  bondholders  whereby 
they  unite  in  purchasing  the  property,  and  organizing 
a  new  corporation  seems  to  be  valid,  so  long  as  there  is 
no  fraud  committed  or  advantage  taken  of  general  cred- 
itors which  amounts  to  fraud."'* 

§  241.  Who  may  participate — Any  party  to  a  reor- 
ganization, whether  creditor,  stockholder,  or  bond- 
holder, who  is  offered  the  privilege  of  coming  in  has  a 

31.  Shaw  V.  Little  Rock,  etc.,  Ry.  Co.,  100  U.  S.  605;  Child 
V.  New  York.  etc..  Ry.  Co..  129  Mass.  170. 

32.  Bliss  V.  Malleson,  45  N.  Y.  22;  Jackson  v.  Ludeling,  21 
AVall.    (88  U.  S.)   Glfi. 

33.  Racine,  etc.,  Co.  v.  Farmers,  etc.,  Co.,  49  111.  331. 

34.  Ponn.  Transportation  Co.'s  Appeal,  101  Pa.  .St.  57G;  Ewing 
V.  Composite  Brake  8hoe  Co.,  100  Mass.  72;  Conf.  Chicago,  etc., 
Ry.  Co.  V.  Howard,  7  Wall.    (U.  S.)    392. 


POOLING    AGREEMENTS.  229 

right  to  participate  in  the  benefits  of  the  organization, 
pro\'ided  he  applies  to  come  in  within  the  time  fixed, 
and  agrees  to  comply  with  the  terms  and  conditions 
stated  in  the  agreement  or  offer.  This  right  ma}] 
be  specifically  enforced.^^  On  the  other  hand,  fail- 
ure to  comply  with  the  requirements  will  forfeit  the 
right.^^  Those  who  are  not  parties  to  the  agreement 
cannot  claim  any  interest  in  the  new  agreement,  un- 
less wrongly  excluded.^^ 

Pooling  Agreements. 

§  242.  The  line  of  distinction  between  pooling  agree- 
ments and  trust  combinations,  while  distinct  enough 
in  fact,  has  frequently  been  lost  sight  of  by  the  courts 
in  their  endeavor  to  prevent  a  stifling  of  competition 
or  restraint  of  trade.  In  effect,  perhaps,  such  agree- 
ments, so  far  as  they  go  toward  the  maintenance  or 
increase  of  prices,  limit  production,  or  output,  act  ex- 
actly as  do  trust  combinations,  and  for  this  reason  they 
have  been  generally  regarded  with  disfavor  by  the 
courts. 

§  243.  Meaning  of  term. —  By  pooling  agreement  is 
meant  an  agreement  between  several  corporations,  each 
maintaining  its  separate  entity,  organization,  and  pow- 
ers for  the  purpose  of  maintaining  just  and  reasonable 
prices,  preventing  unjust  discriminations  in  favor  of 
any  one  or  more  of  the  parties  to  the  agreement,  and 
providing  for  certain  regulations  in  regard  to  changCiv 
in  prices. 

Such  an  agreement,  when  it  does  not  amount  to  a 


35.  Harris  v.  Davis.  44  Fed.  172;  Reading,  etc.,  Co.  v.  Reading 
Iron  Works.  137  Pa.  St.  282. 

36.  Thornton   v.    Wabash   Ry.    Co.,   81    N.   Y.    462;    Bound   v, 
S.  C.  Ry.  Co.,  78  Fed.  49. 

37.  Shaw  V.  Little  Rock,  etc.,  Co..  100  U.  S.  605. 


230      SUMMARY  OF  LAW   OF   PRIVATE   CORPORATIONS. 

transfer  of  the  franchises  or  coii:)orate  powers,  is  not 
forbidden  by  public  i)olie_y.^''* 

§244.  Joint  contracts. —  Joint  contracts,  by  which 
the  several  corporations  become  liable,  for  the  carry- 
ing of  freight,  or  the  transportation  of  passengers,  or 
for  exercising  any  power  which  the  several  corpora- 
tions are  authorized  to  do,  may  be  entered  into,  and 
which  tend  to  promote  each  other's  interests  are  not 
within  the  ban  of  public  policy.^^ 

But  a  contract  by  which  a  corporation  renders  itself 
incapable  of  performing  its  duties,  or  limit  the  sphere 
of  its  action  which  the  public  interests  may  demand, 
or  which  will  prevent  the  corporation  from  exercising 
any  portion  of  the  franchise  committed  to  it,  is  void 
and  illegal  and  forbidden  by  public  policy.'**^ 

Illegality  enters  into  such  agreements  the  moment 
there  is  any  attempt  to  transfer  either  franchise  or 
corjDorate  powers,  or  to  stifle  competition,  for  such 
agreements  approach  the  trust  combination  and  can- 
not be  tolerated. 

"  We  affirm  that  a  contract  between  corporations 
charged  with  a  public  duty,  such  as  is  that  of  common 
carriers,  providing  for  the  formation  of  a  combination 
having  no  other  purpose  than  that  of  stifling  compe- 
tition, and  providing  means  to  accomplish  that  object, 
is  illegal."  '^ 

Voting  Trusts. 

§  245.  The  right  to  vote  hv  proxy,  while  not  a  com- 
mon-law right,  is  now  generally  the  rule,  having  been 

38.  United  States  v.  Trans-Missouri  Freiojht  Assn..  53  Fed. 
440:  Benedict  v.  Western  ITnion,  etc.,  Co..  9  Abb.  N.  C.  214. 

39.  SAvift  V.  Pacific  Mail  Co.,  106  N.  Y.  206 ;  Marine  Bank  v. 
Otrden.  29  111.  248;  Xorth  Side  By.  Co.  v.  Wortbin^ton.  88  Tex. 
5(\2:  Tonnwnndn,  etc..  Bv.  Co.  v.  New  York,  etc.,  Bv.  Co.,  42 
Him    (N.  Y.).  496:   Oliver  v.  Gilmore,  52  Fed.  562. 

40.  Thomas  v.  West  Jersey  Bv.  Co..  101  U.  S.  71  :  Doane  v. 
Chicago,  etc..  By.  Co.,  51  111.  App.  353;  Wiggins,  etc.,  Co.  v. 
Chicago,  etc.,  Bv.  Co.,  5  Mo.  App.  347. 

41.*^Cleveland,  etc.,  By.  Co.  v.  Closser,  126  Ind.  348,  369. 


VOTING    TRUSTS.  231 

made  so  by  statute.  Any  arrangement  whereby  the 
stockholders  place  their  stock  in  the  hands  of  a  trustee 
or  depositary  with  instructions  to  vote  it  as  directed 
by  a  committee  appointed  by  themselves,  and  subject 
to  their  control,  is  only  a  more  convenient  method 
of  voting  by  proxy,  and  is  not  invalid,  provided  the 
arrangement  does  not  contravene  any  express  charter 
or  statutory  provision,  or  does  not  savor  of  fraud  or 
illegality.'^^ 

On  the  other  hand,  an  agreement  to  pool  the  stock 
of  a  corporation  into  the  hands  of  trustees,  and  in- 
vest them  with  power  of  voting  as  the  inclinations  or 
interests  of  such  trustees  may  dictate,  irrespective  of 
the  wishes  or  directions  of  the  owners,  is  void  as  against 
public  policy.^^ 

This  latter  rule  is  borne  out  by  the  weight  of  au- 
thority. But  a  late  case  decided  by  the  Massachusetts 
courts  goes  far  toward  questioning  this  rule,  and  stat- 
ing, in  effect,  that  in  the  absence  of  fraud  of  the  rights 
of  minority  stockholders  or  creditors,  an  agreement 
of  this  kind,  even  though  it  be  continued  for  a  period 
of  years,  is  valid. 

"  In  dealing  with  this  question,  it  does  not  need 
to  be  said  that  combination  of  common  interests  is 
necessary,  and  constantly  taking  place.  It  is  as  legiti- 
mate for  a  majority  of  stockholders  to  combine  as  for 
other  people.  The  fact  that  they  expect  to  "  gain 
an  advantage,"  in  the  words  of  the  syndicate  agree- 
ment, to  accrue  to  them  does  not  make  the  combina- 
tion unlawful.  That  expectation  and  intent  would 
have  that   effect  only  if  the  gain  was  to  be  at  the 

43.  Chapman  v.  Bates,  61  N.  J.  Eq.  658:  Williams  v.  Mont- 
gomery, 68  Hun  (N.  Y.),  416.  148  N.  Y.  519;  Ohio,  etc.,  Ry.  Co. 
V.  State,  49  Ohio  St.  668;  Smith  v.  San  Francisco,  etc.,  Ry.  Co., 
115  Cal.  584. 

43.  Shepaug  Votinsr  Trust  Cases,  60  Conn.  553 :  Harvey  v. 
Linville.  etc.,  Co.,  118  N.  C.  693;  Krei?sel  v.  Distilling  Co.,  61 
N.  J.  Eq.  5. 


232      SUMMARY  OF  LAW   OF  TEIVATE   COEPORATIONS. 

expense  of  the  eorjDoration,  or  in  some  way  was  in- 
tended to  work  a  wrong  to  the  other  stockholders. 
*  *  *  We  know  nothing  in  the  policy  of  our  law 
to  prevent  a  majority  of  stockholders  from  transfer- 
ring their  stock  to  a  trustee  with  unrestricted  powers 
to  vote  upon  it.     *     *     * 

A  stockholder  has  a  right  to  put  his  shares  in  trust, 
Avhatever  his  motive.  If  the  trust  is  an  active  one, 
he  cannot  terminate  it  at  will,  and  the  attempt  to  cut 
himself  off  by  contract,  instead  of  by  the  imposition 
of  duties,  from  ending  it,  certainly  is  not  enough  to 
poison  the  covenant  with  the  plaintiff."  ^* 

An  agreement  of  this  kind  is  illegal  and  void,  if  it 
contemplates  or  works  a  fraud  on  other  stockholders  or 
the  creditors,  or  in  any  way  places  the  interests  of  the 
trustees  in  opposition  to  the  interests  of  the  cor- 
poration.'*^ 

The  general  statement  that  a  proxy  is  revocable  at 
any  time,  unless  coupled  with  an  interest,  holds  good 
in  such  agreements;  and  it  seems  that  such  agreements 
must  be  based  upon  a  consideration,  and  the  cases  agree 
that  the  consideration  must  be  special  and  sufficient, 
rather  than  based  on  mutual  promises.'*^ 

"  Trust  "  Combinations. 

§  246.  Definition. —  A  '^  trust  "  is  an  illegal  combina- 
tion of  legal  institutions  whereby  monopolies  are 
created  and  restrictions  upon  competition  are  accom- 
plished. "  The  distinguishing  feature  of  these  at- 
tempts to  stifle  competition  is  a  combination  of  persons 

44.  Brightman  v.  Bates,  175  Mass.  105,  citinfr  Williams  v. 
Montgomery,  148  N.  Y.  519;  Brown  v.  Pacific  Mail  Co.,  5  Blatchf. 
(U.  S.  C.)    525:   Oroone  v.  Nnsli.  85  Me.   US. 

45.  West  V.  Camden.  135  U.  S.  507;  Cone  v.  Russell,  48  N.  J. 
Eq.  208;  Noves  v.  Marsh,  123  Mass.  286;  Snow  v.  Church,  13 
App.  Div.   (N.  Y.)    108. 

46.  See  cases  cited  under  note  42,  p.  231. 


"  TKUST  "   COMBINATIONS.  233 

(corporations)  engaged  in  any  particular  business  un- 
der agreements  for  controlling  and  limiting  the  output 
of  manufacturing  establishments,  lessening  the  amount 
of  goods  placed  upon  the  market,  and  stipulating  for 
uniform  minimum  prices  of  goods  sold."  ^^ 

This  combination  must  be  distinguished  from  pool- 
ing agreements  and  joint  contracts  which  are  not  illegal 
or  invalid,  and  the  line  of  demarcation  seems  to  be  that 
whenever  there  is  a  combination  of  corporations 
whereby  either  the  franchise,  powers,  or  property,  or 
all  of  one  corporation  pass  under  the  control  of  an- 
other corporation  or  body  of  trustees  controlling  other 
corporations  for  the  purposes  specified,  then  the  agree- 
ment amounts  to  a  "  trust,"  and  is  invalid  and  void 
as  against  public  interests. 

The  common  law  has  always  declared  monopolies 
and  contracts  in  restraint  of  trade  as  illegal.  Most 
of  the  States  have  enacted  constitutional  provisions 
declaratory  of  this  common-law  rule,  but  they  have 
been  of  little  inherent  value,  as  the  great  combinations 
cannot  be  reached  because  their  operations  are  not 
circumscribed  by  the  jurisdiction  of  the  State.  Con. 
gress,  by  the  Anti-Trust  Act  of  1890  (26  Stat,  at  L. 
209),  attempted  to  deal  with  the  subject,  but  its  effect 
has  been  generally  regarded  as  unsatisfactory.  I^ever- 
theless,  a  number  of  decisions  exist  declaratory  of  the 
rule  that  such  combinations  are  invalid  and  void. 

§  247.  Objections  stated —  The  first  decisions  bear- 
ing on  this  subject  were  not  particularly  interested 
in  the  question  of  public  policy,  but  turned  upon  the 
point  that  a  corporation  had  no  right  or  authority 
by  virtue  of  its  charter  to  enter  into  a  partnership 
with  other  companies,  or  with  individuals,  because 
of  the  inherent  differences  existing  between  a  partner- 

47.  2  Bouv.,  p.  911. 


234      SUMMARY  OF  LAW   OF  TRIVATE   CORPORATIONS. 

ship  and  a  corporation.'*®  Later  cases  have  directly  held 
partnerships  and  combinations  between  corporations 
illegal  and  invalid,  for  the  reason  that  they  tend  to 
produce  a  monopoly.^''  "  Monopolies  have  always  been 
regarded  as  contrary  to  the  spirit  and  policy  of  the 
common  law."  The  objections  are  stated  in  the  "  case 
on  monopolies,"  Darcy  v.  Allein,  Coke,  pt.  II,  84b. 
They  are  these:  (1)  "That  the  price  of  the  same 
commodity  will  be  raised,  for  he  who  has  the  sole 
selling  of  any  commodity  may  well  make  the  price 
as  he  pleases;"  (2)  "The  incident  to  a  monopoly  is 
that,  after  the  monopoly  is  granted,  the  commodity 
is  not  so  good  and  merchantable  as  it  Avas  before;  for 
the  patentee,  having  the  sole  trade,  regards  only  his 
private  benefit,  and  not  the  commonwealth;"  (3)  "It 
tends  to  the  impoverishment  of  divers  artificers  and 
others,  who  before,  by  the  labor  of  their  hands  in 
their  art  or  trade,  had  maintained  themselves  and  their 
families,  who  will  now  of  necessity  be  constrained  to 
live  in  idleness  and  beggary."  ^^ 

The  act  of  the  majority  of  the  stockholders  in  sur- 
rendering their  shares  to  the  trustees  of  the  "  trust," 
even  though  no  definite  action  is  taken  by  the  corpo- 
ration itself,  is  regarded  as  the  action  of  the  corpo- 
ration itself.  There  may  be  actual  corporate  conduct 
whicli  is  not  formal  corporate  action,  and  if  that  con- 
duct is  produced  by  the  only  instrumentality  which 
can  wield  corporate  action,  viz.,  the  whole  body  of 
stockholders,  then  such  conduct  is  of  a  corporate 
character.^^ 

48.  Mallory  v.  Hanauer  Oil  Works,  86  Tenn.  598. 

49.  People  v.  North  River  Sugar  Ref.  Co.,  121  N.  Y.  582; 
People  V.  Chicago  Gas  Co.,  130  111.  268;  Gibbs  v.  Con.  Gas  Co., 
130  U.  S.  396. 

50.  State  v.  Standard  Oil  Co.,  49  Ohio  St.  137. 

51.  People  V.  Sugar  Ref.  Co..  121  N.  Y.  582;  State  v.  Stindard 
Oil  Co.,  49  Ohio  St.  137.  See  also  United  States  v.  Addyston, 
etc.,  Co.,  175  U.  S.  211;  Distilling,  etc.,  Co.  v.  People,  156  111.  448. 


"  TRUST  "    COMBINATIONS.  235 

§  248.  When  combinations  are  allowable "  Cor- 
porations, however,  may  lawfully  do  any  acts  within, 
the  corporate  powers  conferred  upon  them  by  legis- 
lative grant.  Under  our  liberal  corporation  laws,  cor- 
porate authority  may  be  acquired  by  aggregation  of 
individuals,  organized  as  prescribed,  to  engage  in  and 
carry  on  almost  every  conceivable  manufacture  or 
trade.  Such  corporations  are  empowered  to  purchase, 
hold,  and  use  property  appropriate  to  their  business. 
They  may  also  purchase  and  hold  the  stock  of  other 
corporations.  Under  such  powers  it  is  obvious  that  a 
corporation  may  purchase  the  plant  and  business  of 
competing  individuals  and  concerns.  The  legislature 
might  have  withheld  such  powers,  or  imposed  limita- 
tions upon  their  use.  In  the  absence  of  prohibitions  or 
limitations  on  their  powers  in  this  respect,  it  is  im- 
possible for  the  courts  to  pronounce  acts  done  under 
legislative  grant  to  be  inimical  to  public  policy.  The 
grant  of  the  legislature  authorizing  and  permitting  such 
acts  must  fix  for  the  courts  the  character  and  limit 
of  public  policy  in  that  regard.  It  follows  that  a 
corporation  empowered  to  carry  on  a  particular  busi- 
ness may  lawfully  purchase  the  plant  and  business  of 
competitors,  although  such  purchases  may  diminish, 
or,  for  a  time,  at  least,  destroy  competition.  Con- 
tracts for  such  purchases  cannot  be  refused  enforce- 
ment. Since  contracts  by  individuals,  and  by  corpo- 
rations having  legislative  authority,  for  the  purchase 
of  competing  plants  and  business,  may  be  made,  and 
are  enforceable,  although,  as  a  result  thereof,  com- 
petition is  diminished  or  temporarily  destroyed,  it 
further  follows  that  contracts  reasonably  required  to 
make  such  purchases  effective  by  protecting  the  pur- 
chaser in  the  use  and  enjoyment  of  the  thing  purchased 
cannot  be  declared  by  the  courts  to  be  repugnant  to 
public  policy.     The  interference  with  competition  re- 


236     SUMMARY  OF  LAW  OF  PRIVATE  CORPORATIONS. 

suiting  from  such  purchases  under  legislative  permis- 
sion being  found  not  to  invalidate  contracts  for  such 
purchases,  the  like  interference  by  contracts  reason- 
ably required  for  the  protection  of  the  purchaser  can- 
not bo  held  to  invalidate  them."  ^^ 

52.  Magie,  C.  J.,  in  Trenton  Potteries  Co.  v.  Oliphant,  58 
N.  J.  Eq.  507. 

No  attempt  is  here  made  to  discuss  combinations  in  connec- 
tion with  the  United  States  Interstate  Commerce  Law.  The  late 
decision  of  the  United  States  Supreme  Court  in  the  Northern 
Securities  Case  (March.  1904)  may  be  taken  as  the  latest  phase 
of  the  law  on  that  subject.  But  compare  article  by  Prof.  Lang- 
dell  in  17  Harvard  Law  Review,  41. 


CHAPTER  XII. 
Peomotees. 

§  249.  Meaning. — "  The  law  imposes  serious  resj)on- 
sibilities  upon  persons  who  become  promoters  of  cor- 
porations, holding  them  to  a  high  standard  of  conduct, 
and  subjecting  to  careful  scrutiny  their  dealings  with 
the  corporation  which  they  promote.  It  is  accord- 
ingly important  to  inquire  what  constitutes  one  a  pro- 
moter of  a  corporation.  The  first  requirement  would 
seem  to  be  a  definition.  But  it  has  become  apparent 
that  it  is  not  practicable  precisely  to  define  the  term 
'  promoter '  as  used  in  connection  with  coi'porations. 
It  is  ambiguous,  and  it  is  necessary  to  ascertain  in 
each  case  what  the  so-called  promoter  did  before  his 
legal  liabilities  can  be  accurately  ascertained.  There- 
fore, what  is  really  to  be  looked  to  is  not  a  word  or 
a  name,  but  the  acts  and  relations  of  the  parties.  The 
term,  however,  is  one  of  accepted  use,  commonly  em- 
ployed to  designate  persons  who  take  some  part  in 
procuring  the  formation  of  a  corporation,  or  in  in- 
ducing others  to  join  it,  and  who  in  so  doing  assume 
such  a  position  that  a  relation  of  a  fiduciary  nature 
between  themselves  and  the  cor[Doration  is  created."  ^ 

Promotership  is  a  question  of  fact,  and  no  definite 
test  can  be  given,  for  one  may  have  done  all  the  acts 
which  seem  to  indicate  promotership,  and  yet  not  be  a 
promoter,  while  another  may  have  remained  silent  and 
kept  in  the  background,  and  yet  be  a  promoter.^ 
Among  the  tests  advanced  are  the  following:  Who 
started  the  idea?     Who  settled  the  scheme  and  insti- 

1.  Alger  on  Promoters,  §  1. 

2.  See  Ex-Mission  Land,  etc.,  Co.  v.  Flash,  97  Cal.  610. 

[237] 


238      SUMMARY  OF  LAW  OF   PRIVATE   CORPORATIONS. 

tuted  the  formation?  Who  undertook  the  liability  for 
expenses?    Who  benefited?^ 

The  outright  purchase  of  property,  with  an  inten- 
tion of  selling  to  a  corporation  formed  to  purchase  it, 
does  not  constitute  one  a  promoter,'*  nor  does  a  con- 
ditional purchase  with  the  same  idea  in  mind  constitute 
one  a  jiromoter,  though  circumstances  may  arise  to 
place  one  within  the  term.^ 

§250.  Relation  to  corporation.- -  The  authorities 
agree  that  the  relationship  of  a  promoter  to  the  coi*pora- 
tion  is  a  fiduciary  one. 

The  English  Companies  Act  of  1862  imposes  no 
"  duty  on  those  promoters  to  have  regard  to  the  in- 
terests of  the  company  which  they  are  thus  empowered 
to  create.  But  it  gives  them  almost  unlimited  power  to 
make  the  corporation  subject  to  such  regulations  as 
they;  please,  and  to  create  it  Avith  a  managing  body 
whom  they  select,  having  such  powers  as  they  choose 
to  give  those  managers,  so  that  the  promoters  can 
create  such  a  corporation,  that  the  coi-poration,  as  soon 
as  it  comes  into  being,  may  be  bound  by  anything, 
not  in  itself  illegal,  which  those  promoters  have  chosen. 
And  I  think  those  who  accept  and  use  such  extensive 
powers,  which  so  greatly  affect  the  interests  of  the 
corporation  when  it  comes  into  being,  are  not  entitled 
to  disregard  the  interests  of  that  corporation  alto- 
gether. They  must  make  a  reasonable  use  of  the  pow- 
ers which  they  accept  from  the  legislature  with  regard 
to  the  formation  of  the  corporation,  and  that  requires 
them  to  pay  some  regard  to  its  interests.  And  con- 
sequently they  do  stand,  with  regard  to  that  corpora- 

3.  Alger,  §  7. 

4.  Foss  V.  Harbottle,  2  Hare,  489;  Densmore  Oil  Co.  v.  Dens- 
more,  64  Pa.  St.  43;  Burbank  v.  Dennis.  101  Cal.  90. 

5.  Plaquemines,  etc.,  Co.  v.  Buck,  52  N.  J.  Eq.  219. 


PROMOTERS.  239 

tion  when  formed,  in  what  is  commonly  called  a  fidu- 
ciary relation  to  some  extent."  ® 

"  There  is  a  fiduciary  relation  between  promoters 
and  between  a  promoter  and  the  company  in  its  corpo- 
rate capacity  which  imposes  on  the  former  the  duty  of 
full  and  fair  disclosure  of  all  facts,  which,  if  known, 
would  probably  lead  to  a  withdrawal  from  the  enter- 
prise. It  is  the  duty  of  a  promoter  toward  those  who 
are  invited  to  co-operate  in  the  enterprise  not  only  to 
abstain  from  stating  as  a  fact  that  which  is  not  so,  but 
not  to  omit  to  state  any  fact  within  his  knowledge  the 
existence  of  which  might  in  any  form  affect  the  extent 
or  the  quality  of  the  advantages  held  out  as  an 
inducement."  ^ 

§  251.  Duties  to  the  corporation. —  In  a  general  way 
the  principles  of  trusteeship  apply  to  promoters,  and 
it  is  their  duty  therefore  to  disclose  to  the  corporation 
all  facts  in  connection  with  the  formation  of  the  cor- 
poration which  in  any  way  involve  the  rights  of  the 
corporation.  To  this  end  the  corporation  is  bound  to 
know  the  profit  or  remuneration  of  the  promoter,  and 
must  assent  thereto.^  This  information  should  be 
made  to  the  corporation  through  the  directors,  or  if 
the  directors  are  interested,  then  in  some  way  commu- 
nicated to  the  shareholders.® 

Concealed  profits,  commissions,  or  gifts  are  there- 
fore a  breach  of  the  relationship  to  the  corporation 
and  are  universally  condemned.  Any  agreements  or 
arrangements  of  this  nature  not  disclosed  gives  the 

6.  Lord  Blackburn  in  New  Sombrero,  etc.,  Co.  v.  Erlanger,  L.  R., 
3  Ch.  Div.  1236.  See  also  statements  of  James,  L.  J.,  and  Sir 
George  Jessel  in  same  case  on  nnpeal,  L.  R..  5  Ch.  Div.  7.?.  To  the 
same  effect  Yale  Gas  Co.  v.  Wilcox,  60  Conn.  105;  Placquemines, 
etc.,  Trust  Co.  v.  Buck,  52  N.  J.  Eq.  219. 

7.  Cortes  Co.  v.  Thannhauser,  45  Fed.  739. 

8.  Chandler  v.  Bacon,  30  Fed.  538;  Yale,  etc.,  Co.  v.  Wilcox, 
64  Conn.  105. 

9.  Simons  v.  Vulcan  Oil  Co.,  61  Pa.  St.  202. 


2-iO     SUMMAEY  OF  LAW  OF  PRIVATE  CORPORATION'S. 

corporation  the  right  to  require  payment  of  the  profits 
which  the  corporation  would  itself  have  made/"  and  if 
one  of  the  promoters  obtains  from  the  owner  of  the 
property  a  certain  commission  for  effecting  the  sale 
to  the  corporation,  he  may  be  compelled  to  share  his 
advantage  with  the  corporation.^^  Further,  where  pro- 
moters secure  options  on  property  at  a  certain  price, 
and  then  turn  it  over  to  the  corporation  at  an  advanced 
price,  without  disclosing  the  transaction,  an  action  will 
lie  by  the  corporation  to  recover  the  difference.^^ 

Promoters  may  also  become  liable  to  the  cor^Doration 
on  the  ground  of  misrepresentation  and  fraud,  under 
.  the  same  circumstances  that  individuals  who  are  not 
promoters  would  become  liable.^^ 

The  doctrine  of  caveat  emptor  does  not  apply  here, 
and  the  rules  applicable  to  representations  as  to  cost, 
value,  and  opinion,  "  in  cases  where  the  parties  deal  at 
arm's  length,"  do  not  obtain.^'* 

For  the  purpose  of  more  clearly  understanding  who 
may  be  promoters,  when  they  become  such,  and  their 
liabilities  to  the  corporation,  the  following  biief  sum- 
maries of  leading  cases  is  attached : 

(a)  A.,  a  promoter,  sold  to  the  B.  Co.,  land  for 
$300,000,  which  he  had  bought  but  a  short  time  be- 
fore for  $10,000.  C,  a  lawyer,  acted  as  such  on  in- 
corporation and  in  the  transfer  of  the  land  to  the  com- 
pany. He  also  distributed  the  prospectuses,  and  when 
the  company  was  attacked,  prepared  an  answer  and 
sent  it  to  the  newspapers.  He  had  no  interest.  Held 
not  a  promoter.^" 

(b)  The  owners  of  a  mine  employed  B.  to  form  and 

10.  Chandler  v.  Bacon,  30  Fed.  538. 

11.  Emory  v.  Parrott,  107  Mass.  95. 

12.  Pittsburg,  etc.,  Co.  v.  Spooner,  74  Wis.  307. 

13.  Atwool  V.  ]\Ierrvweather.  L.  R..  5  Eq.  4(54;  Phosphate,  etc., 
Co.  V.  Harmont,  L.  R,  5  Ch.  Div.  394. 

14.  Chenev  v.  Gleason,  125  Mass.  166. 

15.  Re  Great  Wheal,  etc.,  Co.,  53  L.  J.  Ch.  42. 


PEOMOTEKS.  241 

launch  a  company  to  purchase  the  same.  B.  under- 
took all  of  the  business  arrangements.  It  was  agreed 
between  him  and  the  owners  that  he  should  be  paid 
$50,000  out  of  the  purchase  money  of  $500,000,  which 
amoimt  was  so  paid  him  after  the  formation  of  the 
company.  Action  against  B.  for  the  profits  thus  made. 
B.  alleges  agency  only  on  his  part.  The  decision 
turned  on  whether  the  price  stipulated  was  to  come 
out  of  the  purchase  money.  If  so,  then  his  capacity 
was  that  of  agent  only.  But  the  court  found  that  he 
had  swelled  the  purchase  price  to  get  his  own  price 
and  so  w^as  interested  and  he  was  held  to  be  a  pro- 
moter.^^ 

(c)  O.  and  J.  brought  an  action  against  a  corporation 
for  $500,  claiming  that  as  agents  of  one  F.  they  had 
sold  land  to  the  corporation  for  $10,000.  That  E.  had 
agreed  to  pay  them  a  commission  of  5  per  cent,  for 
their  sendees  in  making  the  sale.  That  the  company 
paid  F.  the  amount,  but  afterward  collected  from  F.  the 
$500.  It  was  contended  that  O.  and  J.  were  agents  of 
F.,  and  as  such  agents  engaged  in  promoting  the  cor- 
poration and  that  they  had  been  paid  for  the  services 
by  the  corporation  and  that  the  corporation  was  en- 
titled to  collect  from  F.  the  $500  which  F.  had  agreed 
to  pay  O.  and  J.  secretly.  They  were  held  to  be  pro- 
moters and  could  not  recover.^^ 

(d)  In  February,  1880,  F.  and  A.  purchased  a  certain 
roadbed  intending  to  form  a  corporation  and  sell  the 
roadbed  to  it  at  a  greatly  advanced  price.  The  corpora- 
tion was  formed  and  the  charter  filed  ten  days  later. 
All  of  these  facts  were  known  to  the  shareholders  and 

F.  and  A.  were  held  in  no  wise  liable  to  the.  corpora- 
tion.^8 

16.  Lydney,  etc..  Co.  v.  Bird,  L.  R.,  33  Ch.  D.  85. 

17.  Central  Land  Co.  v.  Oberchain,  92  Va.  130. 

18.  St.  Louis,  etc.,  Ry.  Co.  v.  Tiernan.  37  Kan.  606. 

16 


242      SUMMARY  OF  LAW   OF  PRIVATE   CORPORATIONS. 

(e)  At  a  judicial  sale  F.  &  Co.  purchased  5,000 
acres  of  land  at  $5  per  acre.  They  then  employed  W. 
and  C.'  as  their  agents  to  effect  a  sale  of  the  lands  at 
$25  per  acre  and  agreed  to  pay  them  a  commission  of 
$5  per  acre.  The  agents  induced  subscriptions  by  rep- 
resenting that  F.  &  Co.  held  a  contract  for  the  purchase 
of  the  land  from  one  Q.  at  $25  per  acre,  the  above  facts 
being  undisclosed.  The  corporation  was  formed,  and 
later  an  action  was  brought  against  W.  and  C.  for  fraud. 
W.  and  C.  contended  they  were  agents  merely,  while 
F.  &  Co.  claimed  them  as  promoters.  Held,  F.  &  Co. 
were  the  promoters,  W.  and  C.  acting  as  their  agents 
merely.^^ 

(/)  R.  and  C.  were  promoters  of  the  B.  Iron  Works, 
and  received  paid-up  shares  of  the  company  as  secret 
profits  or  commissions  on  the  sale  of  the  property  to 
the  company.  They  wanted  some  good  names  for  their 
scheme  and  wrote  G.,  who  agreed  and  did  become  a 
director  provided  he  should  get  fifty. shares  of  the  stock 
held  by  R.  and  C.     G.  was  held  as  a  promoter.^*^ 

(g)  February  1,  1873,  five  persons  purchased  a  mine 
for  $5,000,  with  a  view  of  reselling  it  to  a  corporation 
to  be  formed,  though,  at  that  time,  no  steps  had  been 
taken  to  form  such  company.  They  later  made  a  con- 
tract to  sell  the  mine  to  a  trustee  who  was  to  sell  it 
to  the  company  for  $18,000.  The  company  was  duly 
registered  and  four  of  the  persons  became  directors  of 
the  company,  the  arrangements  were  not  disclosed  to 
the  company,  and  when  discovered,  action  was  brought 
to  recover  the  secret  profit.  Held,  that  the  persons  were 
not  promoters  at  the  time  of  their  original  purchase  and 
therefore  stood  in  no  fiduciary  capacity  to  the  com- 
pany. ^^ 

19.  Ex-Mission  Land  Co.  v.  Flash,  97  Cal.  610. 

20.  Nant-y-Glo,  etc.,  Co.  v.  Grave>  12  Ch.  D.  738. 

21.  Ladywell  Mining  Co.  v.  Brooks,  35  Ch.  D.  400. 


PROMOTEKS.  243 

§  252.  Liability  to  subscribers. —  As  a  usual  thing, 
promoters  are  liable  to  account  for  secret  profits  only 
to  the  corporation. 

But  where  a  promoter  is  acting  as  an  agent  for  the 
intended  corporation,  he  cannot  take  advantage  of  his 
position  to  personally  benefit  himself.  So,  if  promoters 
invite  others  to  join  them  on  terms  of  equality  in 
acquiring  property  with  a  view  of  profit  to  be  made 
from  it  by  a  coi'poration  to  be  organized  for  that  pur- 
pose and  to  be  comprised  of  the  associates,  they  will  not 
be  allowed  to  profit  at  the  expense  of  the  others,  but 
all  profits  must  be  shared  by  the  associates.^^ 

Though  it  is  not  usual,  promoters  may  create  a 
fiduciary  relation  between  themselves  and  the  subscrib- 
ers, in  which  event  it  is  necessary  that  all  facts  %vithin 
their  knowledge  should  be  disclosed,  and  a  failure  to 
so  disclose  the  facts  to  the  subscribers  will  render  them 
liable  in  damages.^^ 

An  action  for  damages  will  lie  against  promoters  by 
the  subscribers  to  the  stock  of  a  corporation  which  sub- 
scriptions have  been  induced  by  misrepresentations 
made  in  such  a  way  as  to  deceive  and  mislead  the  sub- 
scriber, "  This  misrepresentation,  however,  must  be  an 
assertion  of  fact  as  distinguished  froir^  an  expression 
of  an  opinion."  "■*  The  omission  to  state  facts  do  not 
generally  furnish  ground  for  actions  of  deceit,  though 
if  the  omission  were  to  make  the  facts  stated  false, 
then  fraudulent  misrepresentation  would  anse.^^  The 
subscriber  has  a  right  to  rely  upon  representations  of 
material  and  existing  facts,  nor  is  he  bound  to  in- 
vestigate, unless  he  had  notice  sufficient  to  put  him  on 

22.  Emerv  v.  Pnrrott,  107  Mass.  95;  Gcttv  v.  Devlin,  54  N.  Y. 
403;  s.  c,  70  id.  504. 

23.  Brewster  v.  Hatch,  122  N.  Y.  349;  Teachout  v.  Van 
Hoesen,  76  Iowa,   113. 

24.  Alger,  §  132,  and  cases  cited. 

25.  Peek  v.  Gurney,  L.  R.,  G  H.  L.  Cas.  377. 


244      SUMMAKY  OF   LAW   OF   PRIVATE  COKPORATIOXS. 

his  guard."^  "  He  must  show  that  he  relied  upon  or 
was  materially  influenced  by  the  false  statement,  and 
that  he  was  misled  by  it  to  his  injury  "  in  order  to  re- 
cover, and  prove  that  he  has  suffered  damage  thereby.^' 

So,  an  action  for  misrepresentation  will  lie  against 
promoters  who  falsely  represent  to  purchasers  that  the 
capital  stock  has  been  paid  in,  or  that  the  shares  are 
fully  paid,  or  by  fraudulent  pufhng  induce  others  to 
purchase  shares  at  fictitious  rates,  which  shares  hav(^ 
been  issued  either  at  a  discount  or  in  payment  of  prop- 
erty greatly  ovei'^'alued."* 

Promoters  are  not  presumptively  partners,  and  one 
is  not  therefore  lyrima  facie  liable  for  misrepresenta- 
tions made  by  a  copromoter.  In  order  to  hold  one 
promoter  liable  for  misrepresentations  made  by  a  co- 
promoter,  it  must  be  shown  that  the  copromoter  was 
authorized,  either  expressly  or  impliedly,  to  act  as  an 
agent,  and  the  misrepresentation  was  made  within  the 
scope  of  the  authority.^^ 

§  253,  Failure  to  organize. —  If  the  scheme  proves  a 
failure,  the  money  paid  in  to  the  promoters  must  be 
returned.  If  the  ones  originating  the  scheme,  after 
procuring  the  money  to  be  paid  in,  abandon  it,  the  sub- 
scribers may  recover  back  the  money  ]>aid  without  any 
deduction  for  the  expenses  incurred,^"  unless  the  sub- 
scriber has  authorized  his  deposit  to  be  so  applied. 

The  subscribers'  remedy  in  such  a  xjase  is  by  an 
action  at  law,^^  unless  in  a  case  of  fraud,  or  an  account- 

26.  Warner  v,  Seymour,  89  Wis.  290;  Salem  Rubber  Co.  v. 
Adams.  23  Pick.    (Mass)   2.5G. 

27.  Alijer,  §  1.5.5,  and  cases  cited. 

28.  Flajjlor.  etc..  Co.  v.  Flajrlcr.  19  Fed.  468;  Miller  v.  Barber, 
66  N.  Y.  558 ;  Paddock  v.  Fletcher,  42  Vt.  389. 

29.  ]\reachem  on  Agency.  §  743.  and  cases  cited. 

30.  But  see  Nockcls  v.*  Crosby,  3  Barn.  &  C.  814;  Hutton  v. 
Tliompson.  ?>  II.  L.  Cas.   161. 

31.  Denton  v.  :\IacXeil.  L.  R..  2  Eq.  352. 


PROMOTERS.  245 

ing  is  found  to  be  necessary,  when  the  aid  of  equity 
may  be  invoked, "" 

§  254.  Rights  and  liabilities  of  the  corporation  on 
promoters'  contracts. —  The  weight  of  authority  is  in 
favor  of  the  rule  that  unless  the  corporation  has 
adopted  a  contract  made  for  it  by  its  promoters,  no 
liability  is  imposed  upon  it  by  reason  of  such  contracts. 
If  tliere  be  any  exception  to  this  it  is  confined  within 
very  narrow  limits.  Generally,  promises  made  or  con- 
tracts entered  into  by  promoters  before  the  corpora- 
tion comes  into  being  will  impose  no  liability  upon  the 
corporation.^^ 

'•  *  *  *  where  the  fonnation  of  a  corporation 
was  in  contemplation  and  the  promoters  of  the  corpora- 
tion were  taking  initiatory  steps  to  perfect  its  organiza- 
tion and  obtain  a  charter  and  provide  in  advance  the 
means  necessary  for  its  successful  operation,  all  con- 
tracts made  by  such  promoters  for  the  benefit  of  the 
future  corporation  and  which  were  reasonable  and 
proper  to  put  it  in  operation,  the  benefits  of  which  were 
afterward  accepted  by  the  corporation,  became  binding 
on  the  corporation  without  any  formal  contract  to  pay 
*  *  *  but  the  plaintiff  must  show  either  an  express 
promise  by  the  corporation  or  that  the  contract  was 
made  with  persons  then  engaged  in  its  formation  and 
taking  preliminary  steps  thereto,  and  that  the  contract 
was  made  on  behalf  of  the  cor]>oration  in  the  expecta- 
tion on  the  part  of  the  plaintiff  and  with  the  assurance 
on  the  part  of  the  projectors  that  it  would  become  a 
corporate  debt;  and  that  the  corporation  afterward  en- 
tered upon  and  enjoyed  the  benefit  of  the  contract  and 
by  no  other  title  than  that  derived  through  it."  ^* 

32.  Williams  v.  Page,  24  Beav.  654. 

33.  Tift  V.  Quakerr  etc..  Bank.  141  Pa.  St.  .550:  Re  Shaw's 
Claim.  L.  R.,  10  Ch.  App.  177:  Dnyton.  etc..  Co.  v.  Coy.  13  Ohio 
St.  84:  Carmodv  v.  Power!?,  60  Mich.  26;  Morrison  v.  Gold,  etc., 
Co  .   52   Cnl.   306. 

34.  Little  Rock,  etc.,  Ry.  Co.  v.  Perry,  37  Ark.  164. 


I'-IG      SUMMxVKY  OF   LAW   OF  PRIVATE   COKl'ORATIONS. 

A  corporation  can  have  no  agents  until  it  is  brought 
into  existence  and  after  that  it  acts  and  becomes  obli- 
gated only  through  the  instrumentality  of  its  authorized 
representatives.^^  A  contract  made  in  the  name  of  and 
for  the  benefit  of  a  corporation  to  be  subsequently  or- 
ganized can  in  no  way  bind  or  affect  it.^^ 

§  255.  Ratification  or  adoption  of  contracts. —  Much 
discussion  has  been  entered  into  as  to  the  power  of  a 
corporation  to  ratify  contracts  entered  into  between 
promoters  and  individuals  before  the  corporation  came 
into  being.  The  weight  of  authority  seems  to  be  in 
favor  of  the  rule  that  contracts  made  before  the  corpora- 
tion has  acquired  life  may  not  be  ratified.  But  it  may 
unquestionably  make  contracts  when  it  comes  into  exist- 
ence and  there  seems  no  distinction  to  be  made  between 
accepting  and  adopting  contracts  made  in  advance  of  the 
incoi-poration  and  the  making  of  an  entirely  new  con- 
tract."'^ In  other  words,  novation  and  adoption  would 
seem  to  be  interchangeable  in  meaning.  The  accept- 
ance or  adoption  may  be  in  express  language  or  it  may 
be  implied  from  the  acts  of  the  corporation,  as  for  in- 
stance, the  corporation  taking  benefit  of  the  contract. 
"Whatever  be  the  method  employed,  the  corporation  is 
unquestionably  obligated  to  fulfill  the  agreement  thus 
adopted,  under  the  general  principles  of  contract. 

It  cannot  be  said  that  the  law  is  well  settled  on  this 
subject.  In  England  and  in  Massachusetts  it  is  held 
that  a  corporation  may  neither  ratify  or  adopt,  and 
thus  make  the  contract  binding,  though  they  will  allow 
an  action  on  quasi-contract,  if  the  corporation  accepts 
the  benefit  of  such  contracts.^^     In   the  majority  of 

35.  Davis,  etc.,  Wheel  Co.  v.  Davis,  etc.,  Wagon  Co.,  20  Fed. 

fiao. 

36.  Winters  v.  Hub,  etc.,  Co..  .57  Fed.  287. 

37.  Gent  v.  :Mannfac'turers'  Co.,  107  111.  652;  Rogers  v.  New 
York,  etc..  Co.,  134  N.  Y.  197. 

38.  Kelner  v.  Baxter,  L.  R.,  2  C.  P.  174;  Abbott  v.  Hapgood, 
150  Mass.  252. 


PROMOTEKS. 


247 


States,  however,  actions  are  allowed  on  the  contract 
itself,  the  familiar  principle  that  one  who  adopts  the 
benefit  of  an  act  which  another  volunteers  in  his  name 
and  on  his  behalf  is  bound  to  take  the  burden  with  the 
benefit  being  regarded  as  broad  enough  to  hold  the 
corporation  to  a  fulfillment  of  the  contract.^^ 

§  256.  Promoters'  rights  to  compensation  for  services 
rendered. —  (a)  Before  incorporation. — A  claim  for 
money  expended  and  time  employed  before  the  incor- 
poration of  a  company  cannot  be  regarded  as  a  debt 
of  the  institution.  So,  ia  corporation  is  not  liable  for 
services  rendered  in  procuring  subscription  to  the 
capital  stock,  nor  for  services  rendered  to  the  pro- 
moters which  are  not  adopted  by  the  corporation.^*^ 

(&)  After  incorporation. —  In  New  Hampshire  and 
Vermont  it  has  been  held  that  if  the  charter  has  actu- 
ally been  granted,  or  if  the  institution  has  held  itself 
out  as  a  corporation,  it  may  be  liable  although  its  organ- 
ization was  not  completed.  Hence  necessary  expense 
in  procuring  subscriptions  after  the  granting  of  the 
charter  may  be  recovered  of  the  company.'*^  So,  where 
after  the  charter  has  been  granted  and  before  organiza- 
tion, services  are  rendered  which  are  necessary  to  com- 
plete the  organization,  and  after  it  has  been  perfected 
the  corporation  elects  to  take  the  benefits  of  such  ser- 
vices knowing  they  were  rendered  with  the  understand- 
ing that  compensation  should  be  made,  it  will  be  com- 
pelled to.  pay  for  those  services.^^  But  the  general 
weight  of  authority  seems  to  be  against  these  rules,  and 

39.  Stanton  v.  New  York,  etc.,  Ry.  Co.,  59  Conn.  272 ;  Western, 
etc.,  Co.  V.  Cawsley,  72  111.  531 ;  McArthiir  v.  Times  Co.,  48  Minn. 
319;  Scadden,  etc.',  Co.  v.  Scadden,  121  Cal.  33. 

40.  IMarchand  v.  Loan,  etc..  Co..  20  La.  Ann.  .389:  New  York, 
etc.,  Ry.  Co.  v.  Ketehum,  27  Conn.  170;  Safety,  etc.,  Co.  v.  Smith, 
65  111.  309;  Weatherford,  etc.  v.  Granger,  86  Tex.  350. 

41.  Hall  V.  Vermont,  etc.,  Ry.  Co.,  28  Vt.  401. 

42.  Low  V.  Connecticut,  etc.,  Ry.  Co..  4^  N.  H.  370.  See  dis- 
cussion of  the  subject  generally,  Alger,  §§  218-224. 


248      SUMMAKY  OF  LAW  OF  PRIVATE   CORPORATIONS. 

in  favor  of  the  rule  that  a  corporation  is  not  liable  to 
a  promoter  for  services  rendered, 

§  257.  Liability  of  promoters  on  contracts  made  before 
incorporation — This  liability  will  depend  very  much 
upon  the  nature  of  the  particular  contract.  If  the  pro- 
moter binds  himself  personally  by  a  contract,  the  adop- 
tion of  that  contract  by  the  corporation  will  not  re- 
lieve him  from  liability,  unless  the  other  party  con- 
sents to  the  substitution  of  parties,  in  which  case  there 
is  a  novation.  If  this  be  done,  then  the  corporation 
alone  becomes  liable.^^ 

If  the  promoter  contracts,  with  the  understanding 
that  the  other  party  shall  look  to  the  corporation  only, 
when  it  is  formed,  no  personal  liability  will  attach  to 
the  promoter,^"*  for,  as  a  matter  of  fact,  there  is  no 
contract. 

In  the  absence  of  such  an  understanding,  and  a  con- 
tract be  made,  the  promoter  is  liable,^^  and,  of  course, 
is  able  to  enforce  the  contract  in  his  own  name.'**' 

§  258.  Summary  of  the  statements  heretofore  made. 
—  In  the  matter  of  negotiations  prior  to  incorporation, 
the  promoter  is  in  some  ways  regarded'  as  an  agent, 
acting  on  behalf  of  the  future  corporations.  In  others, 
as  a  principal,  the  corporation  not  yet  being  in  ex- 
istence. Circumstances  may  arise  which  make  his  re- 
lation to  the  proposed  stockholders  a  fiduciary  one. 

Ills  relation  to  third  parties. —  (1)  In  making  con- 
tracts he  is  personally  liable  unless  there  be  an  agree- 
ment to  the  contrary.  (2)  If,  however,  the  third  party 
relies  upon  the  corporation,  the  promoter  is  not  liable. 

43.  Queen  Citv,  etc.,  Co.  v.  Crawford,  127  Mo.  356;  Chapin 
V.  Longworth,  31  Ohio  St.  421;  Kelner  v.  Baxter,  L.  R.,  2  C.  P. 
174. 

44.  Re  Heckman's  Estate,  172  Pa.  St.  18.5;  Smith  v.  Parker, 
148  Ind.   127;   Lewis  v.  Weedenfeld,  114  Mich.  581. 

45.  Carmody  \.  Powers,  60  Mich.  26;  Roberts,  etc.,  Co.  v. 
Schlick,  02  Minn.  332. 

46.  Abbott  V.  Hapgood,  150  Mass.  252. 


PROMOTERS.  249 

(3)  If  there  are  several  promoters,  one  is  not  liable  for 
the  acts  of  the  others  as  his  agent,  unless  expressly  or 
impliedly  authorized  so  to  act.  (-i)  If  he  owns  prop- 
erty, he  can  sell  it  to  the  corporation  at  whatever  price 
the  corporation  is  willing  to  pay. 

His  relation  to  the  corporation. —  The  relation  is  a 
fiduciary  one,  hence  he  can  be  held  to  an  accounting 
for  secret  profits  by  the  corporation,  and  under  some 
circumstances  by  the  stockholders  individually. 

(2)  If  he  assumes  contract  liabilities  as  promoter 
and  the  corporation  afterward  adopts  or  novates  the 
contract,  and  accepts  the  benefit,  he  is  relieved  from 
liability,  or  if  not  relieved  from  his  liability  on  the  con- 
tract, the  corporation  must  indemnify  him  from  his 
liability. 

(3)  The  corporation  is  not  bound  to  pay  him  for  his 
services  as  a  promoter,  either  before  or  after  incorpora- 
tion, and  before  organization,  some  jurisdictions  to  the 
contrary. 

The  corporation  s  lidbility  on  contracts  entered  into 
by  promoters. — (1)  If  the  corporation  adopts  or  novates 
them,  and  this  is  assented  to  by  the  third  parties,  the 
corporation  is  bound. 

(2)  But  the  corporation  is  not  bound  if  no  voluntaiy 
action  is  taken  by  it,  even  though  benefit  accrues  to 
it  bv  virtue  of  them. 


I 


INDEX. 


[References  are  to  pages.] 
ACCEPTANCE: 

of  charter,  16. 

repeal  or  alteration  of  charter  before,  37. 
ADVERSE  POSSESSION: 

power  to  take  by,  63. 
AGENTS.     (See  Officers  and  Agents.) 

appointment  of,  173. 

powers  of,  to  receive  subscriptions,  105,  111. 

ratification  of  acts  of,  by  corporation,  95. 

torts,  liability  of  corporation  for,  94. 
AGGREGATE  CORPORATIONS: 

defined,  4. 
AGREEMENTS : 

secret  effect  of,  109. 

to  form  a  corporation,  102. 
ALTERATION  OF  CHARTER: 

power  of  state  to  make,  33. 

extent  of  the  power,  34. 
ALIENATION  OF  PROPERTY: 

power  to  make,  66. 

by  majority,  155. 
AMENDMENTS  TO  CHARTER: 

power  of  state  to  make,  33. 

extent  of  such  power,  34. 
AMERICAN  CORPORATIONS: 

earliest,  3. 
ASSESSMENTS  AND  CALLS,  114,  115.     (See  Calls.) 
ASSIGN^IENT  FOR  BENEFIT  OF  CREDITORS,  209. 

BOOKS  OF  CORPORATION: 

subject  to  inspection,  121,  122,  123. 
BUSINESS  CORPORATIONS: 

defined,  4. 

251 


252  INDEX. 

[References  are  to  pages.] 
BY-LAWS: 

power  of  corporation  to  make,  74,  157. 
rights  of  shareholders  under,   158. 

of  third  parties  under,  159. 
which   create  liens  on  stock,   184. 

CALLS  AND  ASSESSMENTS,  114. 

when  necessary,  114. 

who  may  make,   114. 

manner  of  making,  115. 

must  be  equal,   115. 

upon  increased  capital  stock,   116. 
CAPITAL : 

as  distinguished  from  capital  stock,  99. 
CAPITAL  STOCK: 

defined,  99. 

calls  upon.      (See   Calls.) 
increased,  IIG. 

"good-will"  as  payment  for,  215. 

property  as  payment  for,  216. 
CERTIFICATE  OF  SHARES: 

right  of  shareholder  to,  118. 
CHARTER : 

acceptance  of,   16. 

interpretation  of,  32. 

power  of  state  to  alter,  amend,  and  repeal,  33. 
CITIZEN: 

corporation  as  a,  17. 
CITIZENSHIP: 

of  corporations,   17. 

of  consolidated  corporations,  19. 
COMBINATIONS.      (See    Pooling    Agreements;    Voting    Trusts; 

Trust  Combinations ;  Consolidation ;  Reorganization.) 
CONDITIONS : 

to  formation  of  corporations  de  jure,  20. 
of  corporations  de  facto,  23. 

subscriptions  upon,   107. 

precedent  to  becoming  a  shareholder,  107. 

waiver  of,  by  subscriber,  108. 
CONSIDERATION: 

paid  for  stock,  good-will  as,  215. 
CONSOLIDATED    CORPORATIONS: 

citizenship  of,  19. 


INDEX.  ZO-i 


[References   are   to   pages.] 
CONSOLIDATION  OF  CORPORATIONS: 

meaning  of,  220. 

methods  of,  220. 

right  to,  at  common  law,  221. 

shareholders'  rights  under,  223. 

creditors'   rights  under,   224. 

unauthorized,  222. 

shareholders'  consent,  222. 
CONTEMPT  OF  COURT : 

corporation  subject  to,  97. 
CONTRACTS : 

charters  as,  29. 

effect  of  dissolution  upon,  55. 

of  membership,    101. 

power  of  corporation  to  make,  59. 

promoters,  245. 

liability  of  corporation  on,  245. 

ratification  by  corporation  of  promoters',  246. 

reservations   in   charter,   31. 

ultra  vires.      (See  Ultra  Vires.)  

CONVEYANCES : 

power   to   make,    GO. 

ultra  vires,  65. 
CORPORATE : 

acts,  presumption  as  to,  78. 

liability,   for  torts,  89-96. 

for  acts  of  agents,  94,  95,  105. 

meetings,    150,    151. 

residence,    18. 

records,  right  to  inspect,   121. 
CORPORATIONS : 

defined,  6. 

distinguished  from  partnerships,  7. 
from  joint-stock  companies,  9. 
from  shareholder,  10. 

creation  of,  in  general,  13. 
in  United   States,   14. 
by  legislature,    14. 
under  general  laws,  16. 

citizenship  of,   17. 

and  the  state,  29. 

de  jure,  20. 

de  facto,  22. 


254  INDEX. 

[References  are  to  pages.] 
CORPORATIONS  —  Continued : 
by  estoppel,  27. 

dissolution  of,  50.      (See  Dissolution.) 
and  directors,  1G3.     (See  Directors.) 
and  creditors,  199.     (See  Creditors.) 
powers  of,  57.     (See  Powers.) 
taxation  of,  44.      (See  Taxation.) 
as  subscribers  to  shares,  99. 
and  promoters,  237.      (See  Promoters.) 
CREDITORS : 

relation  to  corporation,   199. 

rights  as,  against  shareholders,  140,  210. 

at  common  law,   139,  206. 

at  equity,  140,  206. 
rights  to  enforce  payment  of  shares,  143,  144,  146,  213,  217. 

to  a  receiver,  209. 

to  interfere  with  corporate  business,  200. 

under  reorganization,  228. 

under  consolidation,  224. 
as  shareholders,  212. 
assignment  for  benefit  of,  209. 
legal  relation  of,  to  other  creditors,  218. 

DAMAGES: 

recoverable   for  corporate   torts,   95. 
DARTMOUTH  COLLEGE  CASE,  30. 
DEBTS: 

under  the  statute,  146. 

secured  by  liens  on  stock,   185,   186. 
DE  FACTO  CORPORATIONS: 

defined,  22. 
DE  JURE  CORPORATIONS: 

defined,  20. 
DELEGATION: 

of  power  to  create  by  state,  15. 
DEVISE: 

power  of  corporation  to  take  by,  64. 
DIRECTORS : 

qualifications  of,   160. 

powers  of,   160. 

and  tlie  corporation,  163. 

liability  to  the  corporation,  163. 

contracts  with  the  corporation,   166. 


INDEX.  255 


[References  are  to  pages.] 
DIRECTORS  —  Continued : 

relation  to  shareholders,  167. 
to  creditors,  168. 

right  to  declare  dividends,   126. 

rights  to  compensation,  170. 

preference  by,  170. 

liability  for  failure  to  file  reports,  172. 

removal  of,  180. 
DISSOLUTION: 

of  corporations,  methods  of,  50. 

by  act  of  legislature,  51. 

forfeiture  of  charter,  51. 
grounds  of,  52. 

surrender  of  charter,  53. 

expiration  of  charter,  54. 

effect  of,  55. 
DIVIDENDS : 

defined,   124, 

out  of  what  paid,  125. 

not  a  debt,  126.  ^ 

who  may  declare,   126. 

"  declared  "  defined,   127. 

shareholders'  rights  to,  124. 

what  shareholders  entitled  to,   127. 

shareholder's  right  to  compel,  130. 

stock,  129. 

ELEMENTS: 

necessary  to  de  facto  existence,  23. 
EMINENT  DOMAIN: 

defined,  40. 

rights  of  state  under,  40. 
ENGLISH  RULE: 

as  to  ultra  vires,  82. 
ESTOPPEL: 

corporations  by,  27. 
EXEMPTION ; 

from  taxation  by  state,  47. 
EXPIRATION  OF  CHARTER,  54. 
EQUITY : 

courts  of,  will  aid  shareholder,   133. 

when  aid  may  be  invoked,  134. 

liability  of  shareholders  to  creditors  in,   141. 


256  INDEX. 

[References  are  to  pages.] 
FACULTIES  OF  CORPORATION: 

outlined,  G. 
FIFTH  AMENDMENT: 

and  its  effect  upon  corporate  powers,  29. 
FOREIGN  CORPORATIONS: 

state  control  over,  42. 
FORFEITURE : 

of  charter  by  state,  52. 

of  shares  by  corporation,    139. 
FOURTEENTH   AMENDMENT: 

and  its  effect,  29. 
FRANCHISE : 

charter   as,   45. 

taxation  of,  45. 

GENERAL  LAWS: 

creation  of  corporations  under,   16. 
GENERAL  MANAGER: 

powers  of,  17G. 
GIFTS: 

of  stock,   188. 

cau«a  mortis,  189. 

inter  vivos,  188. 
GOOD-WILL: 

as  consideration  for  stock,  215. 

HISTORY  OF  CORPORATIONS,  1. 

ILLEGAL  ACTS  OF  CORPORATION: 

effects  of,  84. 
INCIDENTAL  POWERS  OF  CORPORATION,  76. 
INFANTS : 

as  subscribers  and  shareholders,  98. 
INSPECTION : 

of  corporate  records,   121. 

books  which  may  be  inspected,   122. 

who  may  make,  123. 

books  of  insolvent  corporation,   123. 
INTENT : 

necessary  to  form  a  corporation,   7. 
INTERPRETATION  OF   CHARTERS,   32. 


I 


INDEX.  2d7 

[References   are   to   pages.] 
JOINT  CONTRACTS:  ...    ,. 

legality  of,  230.     ■ 
JOINT-STOCK  CORPORATIONS: 

distinguished  from  corporations,  9. 

LEASE: 

power  of  corporation  to  make,  G6. 
LEGISLATURE : 

power  of,  to  create  corporations,  14. 

control  over  corporations,  33.       (See  State's  Control  Over.) 

forfeiture  of  charter  by,  51.      (See  Dissolution.) 
LIABILITY  OF  MEMBERS,  137.      (See  Shareholder's  Liability.) 
LIEN  ON  STOCK: 

at  common  law,  182. 

how  created,  182. 

national  banks,  183. 

statutory  provisions  creating,  183. 

by-laws  which  create,  184. 

notice  of,  and  of  by-laws,  1S4. 

shares  covered  by,   184. 

debts  secured  by,  185,  186. 

waiver  of,  by  corporation,  .186. 

enforcement  of,  187. 

right  of  corporation  to  refuse  transfer  because  of,  187. 
LIMITED  COMPANIES: 

defined,  5. 

MAJORITY: 

power  of,  153. 

to  alienate  property,  155. 
MANAGEMENT  OF  CORPORATIONS,  149. 
MANDAMUS  TO  COMPEL  INSPECTION,   123. 
MARRIED  WOMEN: 

as  subscribers  and  shareholders,  99. 
MEETINGS : 

of  corporation,  150. 

notice  of.  151. 

time  of,  152. 

place  of,   152. 
MEMBERS.      (See  Shareholders.) 


258  INDEX. 

[References   are  to   pages.] 

MEMBERSHIP: 

rights  and  liabilities  in  general,  98-148. 

contracts  of,  101. 

rights  in  particular,  IIC. 
MORTGAGE: 

power  of  corporation  to  make,  67. 

NEGOTIABLE  PAPER: 

power  of  corporation  to  issue,  68. 
"NET  PROFITS": 

defined,   124. 
NOTICE  OF  CORPORATE  MEETINGS,  151. 

of  by-laws,  159. 

which  create  lien,  184. 

to  officers  notice  to  corporation,  179. 
NUL  TIEL  CORPORATION : 

plea  of,  27. 

OFFICERS  AND  AGENTS: 

appointment  of,  173. 

powers  in  general,  174. 

rights  to  compensation,  175. 

secret  profits  not  allowed,  176. 

liability  for  false  representations,  176. 

general  manager,  duties  and  powers,  176. 

president,  duties  and  powers,  178. 

other  officers,  duties  and  powers,  179. 

knowledge  of,  notice  to  corporation,  179. 

removal  of,  180. 

revocation  of  powers,  179. 
ORIGIN  OF  CORPORATIONS,  1. 

"  PAID-UP  "  SHARES,  146. 
PARTIES: 

to  action  to  compel  pajTnent  of  shares,  144. 
PARTNERSHIP : 

distinguished  from  corporation,  7. 

power  of  corporation  to  enter  into,  13. 
PLACE  OF  CORPORATE  MEETINGS,  152. 
POLICE  POWER: 

defined,  37 

scope  of,  38. 

limitations  upon,  39. 


INDEX.  250 


[References   are  to  pages.] 
POOLING  AGREEMENTS,  229. 

validity  of,  229. 
POWERS  OF  CORPORATIONS,  6,  57,  76. 

in  general,  57. 

implied,  57. 

limitations  upon,  58. 

to  make  contracts,  59. 

to  take  and  hold  property,  60. 
limitations  upon,  62. 

to  take  by  devise,  64. 

to  alienate  property,  66. 

to  lease  property,  66. 

to  borrow  money,  67. 

to  mortgage  its  property,  67. 

to  issue  negotiable  paper,  68. 

to  act  as  trustee,  69. 

to  enter  into  a  partnership,  70. 

to  acquire  its  own  stock,  72. 

to  acquire  stock  of  other  corporations,  73. 

to  make  by-laws,  74. 
POWER  OF  STATE : 

to  alter,  repeal,  etc.,  33. 

to  create  corporations,  13. 
PREFERENCE : 

right  of  shareholder  to  an  increase,  124. 

of  creditors,  209. 

of  directors,  170. 
PRESIDENT: 

powers  and  duties,  178. 
PRIVATE  CORPORATIONS : 

defined,  4. 
PROFITS  : 

defined,  124. 
PROMOTERS : 

meaning  of  term,  237. 

relation  to  the  corporation,  238. 

duties  to  the  corporation,  239. 

who  are,  240. 

liability  to  subscribers,  104,  243,  248. 
for  failure  to  organize,  244. 

rights  of  corporation  as  against,  245. 

liabilities  of  corporation  on  contracts  of,  245. 


260  INDEX. 

[References  are  to  pages.] 
PROMOTERS  —  Continued : 

rights  to  compensation,  247. 

liability  on  contracts,  248. 
PROPERTY: 

alienation  of,  66,  155. 

as  papnent  for  stock,  216. 

"true  value"  rule,  216. 

"good  faith"  rule,  217. 
PROXY  VOTING,  121. 
PUBLIC  CORPORATION: 

defined,  4. 
PUBLIC  SERVICE  CORPORATION 

defined,  5. 

QUASI-PUBLIC  CORPORATION : 

defined,  5. 
QUO  WARRANTO: 

writ  of,  26. 

REAL  ESTATE: 

power  of  corporation  to  take  and  hold,  60. 
RECEIVER: 

shareholder's  right  to,  136. 

creditor's  right  to,  209. 
RESCISSION  OF  SUBSCRIPTION: 

English  rule,  112. 

U.  S.  rule,  113. 
REORGANIZATION :  ■ 

meaning  of  teim,  225. 

authority  for,  226. 

methods  of,  227. 

who  may  participate,  228. 
REIEAL  OF  CHARTER: 

power  of  state  to,  33. 

limitations  of  power  of  state  to,  34. 
REPORTS : 

liability  of  directors  for  failure  to  file,  172. 
RESIDENCE  OF  CORPORATIONS,  18. 
ROIVIAN  CORPORATIONS,  1. 

SCIRE  FACIAS: 
^\Tit  of,  3,  26. 


I 


INDEX.  261 

[References   are  to   pageS.] 


"SET-OFF^': 

by  shareholders,  148. 
against  unpaid   subscriptions,   148. 
under  statutory  liability,  148. 
SHARES  OF  STOCK: 
defined,  100. 

transfer  of,  118.      (See  Transfer.) 
"  paid-up."  meaning  of.  140. 
covered  by  lien,  184. 
gifts  of,  188. 

negotiability  of  certificates,  191. 
liens  on,  183.      (See  Liens.) 
taxation  of,  48. 
SLANDER : 

corporate  liability  for,  92. 
SOLE: 

corporations,  4. 
SPECIAL  SANCTION: 

to  create,  7,  S. 
STATE : 

creation  of  corporations  by,  14. 
delegation  of  power  to  create,  15. 
control  over  corporations,  33. 

power  to  repeal,  alter,  etc.,  33. 
police  power,  37. 
eminent  domain,  40. 
foreign  corporations,  42. 
to  tax  corporations,  44. 
to  dissolve  corporations,  50. 
STOCK.     (See  Capital  Stock.) 
SHAREHOLDERS: 

who  may  become  such,  98. 
infants  as,  98. 
married  women  as,  99. 
corporations  as,  99. 
trustees  as,  99. 
relation  to  directors,  167. 
as  creditors,  212. 

distinguislied  from  corporation.  3,  10, 
SHAREHOLDER'S  RIGHTS: 

to  prevent  ultra  vires  acts,  87. 
to  a  certificate  of  shares.  117. 


262  INDEX. 

[References   are   to   pages.] 
SHAREHOLDER'S  RIGHTS  —  Continued: 
to  transfer  his  shares,  117,   197. 
to  vote,  lis. 

to  inspect  corporate  records.  121. 
to  dividends,  124. 
to  compel  dividends,  130. 
to  interfere  with  corporate  business,  132. 
to  a  receiver,  130. 

to  a  preference  on  increased  stock,  131. 
to  stock  dividends,  129. 
under  consolidation.  223. 
reorganization,  228. 
by-laws,  158. 
to  set-off,  148. 
SHAREHOLDER'S  LIABILITY: 
in  general,  137. 
to  the  corporation,  137. 
to  other  shareholders,  138. 
to  creditors,  140,   141,  210. 
under  statutes,  144,  145. 

what  shareholders  liable,  146. 
effect  of  repeal  of  statute,  147. 
set-off  under,   148. 
to  pay  full  value  of  shares,  213. 
for  ultra  vires  acts  of  corporation,  86. 
for  ultra  vires  torts  of  corporation,  87. 
SUBSCRIBERS  AND  PROMOTERS,  243.  244. 
SUBSCRIPTIONS  FOR  STOCK.  102. 

agreements  to  form  a  corporation,  102. 
actual  subscriptions  thereto,  102. 
made  to  promoters.  104. 
after  incorporation,   105. 
powers  of  agents  to  receive,  105. 
formalities  and  modes  of,  106. 
upon  conditions,  107. 

conditions  precedent.   107. 
waiver  of  conditions  for,  108. 
upon  special  terms,   108. 

secret  agreements,  109. 
induced  by  fraud.  110. 
right  to  rescind,    112,    113. 


INDEX.  263 

[References  are   to   pages.]  ^ 


SURPLUS : 

defined,  124. 
SURRENDER  OF  CHARTER,  53. 

TAXATION: 

defined,  44. 

corporate  property  subject  to,  44. 

franchise  as  property,  45. 

limitations  upon,  by  state,  45. 

methods  of,  46. 

of  shares  of  stock,  48. 
TENANTS  IN  COMMON: 

corporation   may  hold   as,   63. 
TIME  OF  MEETINGS,  152. 
TORTS : 

liability  of  corporation  for,  89. 

of  corporation  for  ultra  vires,  86. 
of  corporation  for  agents'  torts,  94. 

civil  liability  of  corporation  for,  89. 

criminal  liability  of  corporation  for,  96. 
TRANSFER: 

of  shares,  in  general,  189. 

agreements  not  to,  193. 

restrictions  upon,  192. 

contract  for,  must  be  in  writing,  191. 

unauthorized,  194. 

effect  of,  195. 

unregistered,  as  between  parties,   196. 
as   against  corporation,    196. 
creditors,   197. 

shareholder's  right  to,    197. 

corporation's  right  to  refuse,  under  lien,  187. 
TRUST: 

power  of  corporation  to  hold  in,  63. 
TRUST  FUND  THEORY,  142,  201. 
•'  TRUST  "  COMBINATIONS : 

definition,  232. 

features  of, 

objections  to,  233. 

where  allowable,  235. 


264  iM>p:Xi 

[References   are   to   pages.] 

TRUSTEE: 

power  of  corporation  to  act  as,  (JO. 
as  subscribers  and  shareholders,  &9. 

ULTRA  VIRES: 

acts,  78,  84. 

conveyances,  G5. 

contracts,  78. 

meaning  of  term,  79. 

origin  of,  80. 

United  States  rule,  82. 

English  rule,  80. 

rule  when  contracts  wholly  or  partly  executory,  84. 

when  contracts  fully  executed,  85. 

when  contracts  executed  on  either  side,  86. 
as  to  negotiable  paper  issued,  80. 
torts,  86. 

shareholder's  liability  for,  87. 

corporation's  liability  for,  86. 
shareholder's  right  to  prevent,  87. 
who  may  plead  it.  87. 
UNAUTHORIZED: 

acts  of  agents,  liability  for,  94. 
transfers,  194. 
consolidation,  222. 
UNITED  STATES: 

creation  of  corporations  in,  14. 

courts,  citizenship  of  corporations  in,  23. 

constitution,  as  affecting  corporate  contracts,  29. 

VALIDITY: 

of  statutes  oeating  corporations,  26. 
VOTING : 

who  entitled  to,  118. 

cumulative,  119. 

by  proxy,  120,  121. 
VOTING  TRUSTS: 

meaning  of,  2.30. 

validity  of,  230. 

WAIVER : 

of  lien  on  shares,  186. 


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